Determinants of Entry Mode and Expansion

Decisions by Scandinavian MNEs in China

Master’s Thesis

Anna Jacobsson

Tabea Hill

Supervisor: Bersant Hobdari

May 15th, 2017

Copenhagen Business School

M.Sc. in Economics and Business Administration

International Business

This paper contains 265 763 characters (including spaces) and 116.8 pages

Acknowledgments

First of all, we would like to thank our supervisor, Bersant Hobdari, for his guidance,

feedback and support throughout this thesis. We are also grateful to our interviewees

Charlotta Bengtsson and Simon Maynard from IKEA, Maria Eistrand from H&M and Peter

Kiaer from Grundfos. They have provided us with valuable insights regarding their

experiences in the Chinese market. Finally, we would like to thank our families and friends

who have supported us throughout this thesis.

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Abstract

In the past decades, China has attracted many multinational enterprises (MNEs) through

its continuous economic growth and greater openness towards foreign investment. At the

same time, companies that are doing business in China are confronted with various

challenges in the external environment. In order to operate successfully in China, firms

have to make crucial decisions in regards to their entry mode and expansion strategies.

Despite the vast amount of research on entry mode decisions in international business

literature, little attention has been drawn to later stages of internationalisation as well as

Scandinavian firms in the Chinese market. Therefore, this thesis investigates determinants

of entry mode and expansion decisions by Scandinavian MNEs in China. By focusing on

five main theories, namely Transaction Cost Theory, the Resource-Based View, the Eclectic

Paradigm, Institutional Theory and the Evolutionary Process of Global Market Expansion,

we examine internal and external factors which influence these decisions. This is done by

applying two complementary research methods. First, a quantitative part concentrates on

the entry mode choice between a Joint Venture (JV) and a Wholly Owned Subsidiary

(WOS). Thereafter, a qualitative part explores expansion determinants through the

application of a multiple case study, including three Scandinavian MNEs. The quantitative

analysis shows mostly inconclusive results. However, the qualitative findings reveal that

several factors influence expansion decisions in China. We suggest that certain internal

and external factors gain influence in later stages of a company’s expansion process. This

implies that time plays an important role. Overall, our thesis contributes to a deeper

understanding of determinants related to challenges and opportunities of MNEs entering

and operating in China.

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Table of Contents

Abstract .................................................................................................................................... 1

1. Introduction ......................................................................................................................... 8

1.1 Research Problem and Purpose .................................................................................... 10

1.2 Research Question ........................................................................................................ 11

1.3 Delimitations ................................................................................................................. 11

1.4 Thesis Disposition ......................................................................................................... 12

2. Literature Review ............................................................................................................... 14

2.1 International Entry Mode Decisions and Theories ...................................................... 14

2.1.1 The Eclectic Paradigm............................................................................................. 15

2.1.2 The Resource-Based View ...................................................................................... 17

2.1.3 Transaction Cost Theory ........................................................................................ 18

2.1.4 Institutional Theory ............................................................................................... 20

2.1.5 China’s Institutional Environment .........................................................................23

2.1.6 Other Entry Mode Theories .................................................................................... 25

2.1.6.1 Cultural Influences on Entry Mode Decisions .................................................... 25

2.1.6.2 Localisation and Globalisation Strategies ........................................................... 27

2.1.7 Motivation for Focusing on the Chosen Entry Mode Theories ............................. 29

2.2 Types of Entry Mode Strategies .................................................................................. 30

2.2.1 Wholly Owned Subsidiary ......................................................................................32

2.2.2 Joint Venture ..........................................................................................................32

2.2.3 Other Entry Modes ................................................................................................. 33

2.3 International Expansion Theories............................................................................... 34

2.3.1 The Evolutionary Process of Global Market Expansion ........................................ 35

2.3.2 Preparation Stage .................................................................................................. 36

2.3.3 Entry Stage ............................................................................................................ 36

2.3.4 Expansion Stage ..................................................................................................... 37

2.3.5 Experienced Stage ................................................................................................. 38

2.3.6 The Evolutionary Perspective as an Expansion Framework of Multinational

Companies in China ....................................................................................................... 38

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2.4 Conceptual Framework ............................................................................................... 39

3. Methodology ...................................................................................................................... 42

3.1 Purpose and Research Design...................................................................................... 42

3.2 Operationalisation ....................................................................................................... 42

3.2.1 Operationalisation of the Quantitative Part .......................................................... 43

3.2.2 Operationalisation of the Qualitative Part ............................................................ 43

3.3 Scientific Perspective ................................................................................................... 44

3.3.1 Research Philosophy............................................................................................... 45

3.3.2. Research Approach .............................................................................................. 46

3.3.3 Research Strategies and Choices............................................................................ 47

3.3.4 Time Horizons, Techniques and Procedures ........................................................ 48

3.4 Data Collection ............................................................................................................ 49

3.4.1 Sample - Quantitative Model ................................................................................. 49

3.4.2 Sample - Interviews ............................................................................................... 50

3.4.3 Model and Measurement – Quantitative Part ....................................................... 51

3.4.4 Variables ................................................................................................................. 52

3.5 Source Critical Consideration - Quantitative Part ....................................................... 61

3.6 Source Critical Consideration - Qualitative Part ......................................................... 62

3.7 Research Ethical Reflection ......................................................................................... 63

4. Empirical Data .................................................................................................................. 64

4.1 Findings from the Quantitative Part............................................................................ 64

4.1.1 Descriptive Statistics ............................................................................................... 65

4.1.2 Empirical Results ................................................................................................... 69

4.2 Findings from the Qualitative Part .............................................................................. 75

4.2.1 The Regulatory and Institutional Environment in China ...................................... 75

4.2.2 Case Companies ..................................................................................................... 76

5. Analysis and Discussion ..................................................................................................... 81

5.1 Analysis of Entry Mode Determinants - Quantitative Part .......................................... 81

5.1.1 Internal Determinants ............................................................................................ 81

5.1.2 External Determinants .......................................................................................... 85

5.1.3 Summary of the Quantitative Analysis ................................................................... 91

5.2 Analysis of Entry Mode and Expansion Determinants - Qualitative Part .................. 92

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5.2.1 Entry Mode and Expansion Strategies .................................................................. 92

5.2.2 Internal Determinants ........................................................................................... 95

5.2.3 External Determinants ......................................................................................... 101

5.2.4 Summary of the Qualitative Analysis ................................................................... 107

5.3 Comparison of the Results of our Quantitative and Qualitative Analysis ................. 108

6. Conclusion ........................................................................................................................ 113

7. Limitations ........................................................................................................................ 117

References ................................................................................................................................ I

Appendices ......................................................................................................................... XVII

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List of Tables

Table 1 - Interview Information ............................................................................................. 51

Table 2 - Overview of Variables and their Characteristics ................................................... 60

Table 3 - Home Countries and Entry Mode Choices ............................................................ 66

Table 4 - Industry Distribution ............................................................................................. 66

Table 5 - Distribution of the Number of Employees ............................................................. 67

Table 6 - Pearson Correlation Table ..................................................................................... 68

Table 7 - Logistic Regression Results Model 4 ..................................................................... 70

Table 8 - Logistic Regression Results Model 6 ..................................................................... 70

Table 9 - Results of the Logistic Regression Models ............................................................. 72

Table 10 - Statistical Test Results .......................................................................................... 73

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List of Figures

Figure 1 - Matrix of Global Integration versus Local Responsiveness ................................. 28

Figure 2 - A Hierarchical Model of Entry Mode Choices ..................................................... 30

Figure 3 - Entry Modes for International Expansion ........................................................... 34

Figure 4 - The Evolutionary Process of Global Market Expansion ...................................... 36

Figure 5 - Conceptual Framework ......................................................................................... 41

Figure 6 - The Research Onion .............................................................................................. 45

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List of Abbreviations

MNE Multinational Enterprise

TCT Transaction Cost Theory

RBV Resource-Based View

OLI Ownership, Location, Internalisation Advantages

VRIO Valuable, Rare, Imitable, Organizationally Embedded Resources/Capabilities

IT Institutional Theory

NIT New Institutional Theory

JV Joint Venture

WOS Wholly Owned Subsidiary

FDI Foreign Direct Investment

OECD Organisation for Economic Co-operation and Development

IPR Intellectual Property Rights

GDP Gross Domestic Product

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1. Introduction

“If you can make it in China, chances are good you will make it anywhere.”

- Peter Kiaer, Sales Director of Grundfos China

The above statement, made by one of our interviewees, emphasises the large potential but

also the various challenges faced by foreign firms in the Chinese market. China’s economic

development in the past decades has led many multinational enterprises to enter and

expand in the country. With economic reforms starting in the late 1970s, China has

increasingly fostered foreign investments and opened up industries to the participation of

foreign companies (Cui, 1988). Especially in the 1990s, foreign companies started

investing significantly in China (Kok-Kheng Yeoh & Hoi-Lee Loh, 2008). In December

2001, China joined the World Trade Organisation (WTO, 2017) which created new

opportunities for the country in the world economy and also encouraged foreign firms to

set up operations there. The country’s growing demand for consumer goods and services

has created vast opportunities in many industries (Perkowski, 2012). New policies have

encouraged many leading multinational corporations to establish positions in China and

MNEs have also expanded inside its boundaries (Cui, 1998). Next year marks the 40th

anniversary (1978 - 2018) of the “open-door” policy in China (Fang et al., 2008) and the

Chinese government recently reinforced its position towards an open market. It was during

the World Economic Forum 2017 that President Xi Jinping announced that restrictions on

foreign investments will be reduced (Reuters, 2017). Even though China’s time of double

digit economic growth is probably over and expected not to strongly exceed 6.5% in 2017

(Spiegel, 2017), the market still offers tremendous opportunities and remains highly

attractive for MNEs (Tse, 2016).

While many firms have successfully entered and expanded in China, the journey has not

been so successful for others. This is especially due to the continuous evolvement of

various external and internal challenges, which for some firms have ultimately led to a

withdrawal from China. In particular, the complex and dynamic market poses problems

(Tse, 2016). This shows that entering and doing business in China still comes with a

number of challenges and risks. For instance, challenges may relate to external factors

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such as institutional and regulatory restrictions or internal factors such as the protection of

firm-specific knowledge. Challenges often differ depending on the geographical region and

industry in which a firm operates as well as the business strategy of a company (Cui, 1998).

Along with parameter changes in China’s competitive and regulatory environment, MNEs

have changed strategies by going from being foreign investors to strategic insiders. For

instance, MNEs have shifted their strategy in treating China as a market for relocating

production and transferring competence, to integrating Chinese operations into the

companies’ value chains as well as building competence on site. Another example is the

shift from little geographic adaptation of products to responsive diversification. In short,

MNEs’ Chinese operations have developed to become a very important part of their overall

success (Luo, 2007). Therefore, firms have to make crucial strategic decisions regarding

their entry mode and expansion in China. As the outcomes of these decisions are also

related to a later success or failure in the market, factors influencing these decisions are of

high interest in research and for MNEs. Given the relevance of entry mode choices, the

topic has been investigated intensively in international business literature (Shaver, 2013).

Several underlying theories have been identified when it comes to explaining external and

internal factors which impact entry mode decisions. However, challenges and

opportunities related to later stages of expansion appear not to have received as much

attention in research. In addition, foreign direct investment (FDI) research has mostly

been related to companies from OECD countries such as the United Kingdom, the United

States, Japan and Germany, even though smaller countries are also characterised by

substantial FDI activity. For instance, many Scandinavian firms have long international

backgrounds and some of them have become important players in global markets (Larimo,

2003). The advanced industrial economies of Scandinavia largely depend on external

markets and in the past decade, China has been labelled as the largest trading partner of

the region (Kok-Kheng Yeoh & Hoi-Lee Loh, 2008). Based on these arguments, the aim of

this thesis is to fill a research gap by investigating two sides of the internationalisation

process, namely entry mode decisions and expansion strategies by Scandinavian firms in

the Chinese market. In particular, this is done with respect to internal, firm-specific,

factors and external, country-specific, factors which may influence these decisions. Our

study draws on classical entry mode theories as well as an expansion theory. It provides a

comprehensive and multi-layered understanding of determinants of entry mode and

expansion strategies of Scandinavian MNEs in China. The study adds new information to

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previous entry mode theories and expansion research and uses both quantitative and

qualitative methods to enrich our findings.

Overall, most of our quantitative findings do not find statistical support. This shows that

our selected entry mode factors do not seem to influence entry mode decisions between a

JV and a WOS of Scandinavian firms in China. On the contrary, we find evidence that the

expansion strategy of firms is influenced by several internal and external factors. On the

one hand, challenges in the Chinese market are mostly related to distance in culture and

institutions which seem to play an important role in later stages of expansion. On the other

hand, opportunities are connected to China’s degree of openness towards foreign

investment and economic growth. All in all, the conceptual framework developed in this

thesis serves as a useful tool for managers when identifying influencing determinants of

entry mode and expansion decisions.

1.1 Research Problem and Purpose

As outlined above, entry modes predictors, choices of ownership levels and following

consequences have been researched intensively (Werner, 2002). However, scholars have

mainly focused on companies from economies in the OECD (Larimo, 2003) or the Triad

Nations, like the United States or Japan, entering various markets worldwide, including

China (Canabal & White, 2008). Little emphasis has been put on multinational

corporations from Scandinavia entering China. Previous studies have for instance

examined to what extent international experience influences the performance of

Scandinavian companies in China (Carlsson et al., 2005), how Scandinavian MNEs

respond to government pressures in the market (Björkman & Osland, 1998), or the nature

of technology spill over of these firms in China (Bruun & Bennett, 2002). Nevertheless,

there seems to be a research gap in regards to entry mode decisions and expansion

strategies of Scandinavian MNEs. Therefore, our thesis focuses on this particular topic

where we examine strategies of firms from Denmark, Sweden and Norway going into the

Chinese market. We aim to contribute to existing literature and broadening the view on

this specific field of research, by exploring it from a Scandinavian perspective.

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Furthermore, research on entry modes has especially focused on entry mode decisions but

not on the subsequent expansion in the Chinese market. By regarding the other side of the

equation as well, namely after companies have entered China, we contribute to this less

researched area in the literature. This is done by unveiling expansion theories and

strategies as well as by exploring influencing factors of three Scandinavian case companies.

Thus, the development after the initial market entry is also analysed.

1.2 Research Question

As previously outlined, little research has been conducted on the entry mode and

expansion strategies of Scandinavian companies in the Chinese market. This leads us to

further explore the topic and contribute to literature by formulating the following research

question:

How do different factors influence entry mode and expansion strategies of

Scandinavian MNEs in the Chinese market?

This central question implies two different paradigms which are also reflected in the

structure of this thesis. On the one hand, a strong emphasis is put on the entry mode side

of internationalisation. On the other hand, the following expansion of multinational

enterprises is regarded. Both parts are inherently connected, also through the challenges

and opportunities which can affect both sides of the equation.

1.3 Delimitations

In this thesis, we focus our attention on Swedish, Norwegian and Danish companies which

have entered and/or expanded in the Chinese market during the years between 2007 and

2017. We are aware that our study probably would have produced different findings if

other industries, home or host countries had been included. In addition, we recognize that

our results are specific to the selected time period. In regards to the quantitative part of

this thesis, which concentrates on determinants of entry mode decisions, the data is

limited to secondary sources. By relying on these sources, we are limited to their provided

information. Our quantitative sample is also restricted to contain companies with a

minimum of 50 employees. The decision was based on the purpose of investigating MNEs,

however a higher firm size restriction resulted in an inadequate sample size. Moreover, our

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investigated entry mode choice is limited to choosing between a JV and a WOS. We

acknowledge that other entry modes exist, however they are not analysed in this thesis. In

addition, we do not focus on investigating differences between the three Scandinavian

countries in terms of entry mode and expansion decisions. This is rooted in the similarity

of Scandinavian firms in regards to business culture (Carlsson et al., 2005) as well as their

political, cultural and societal environment (May et al., 2007). Therefore, analysing

Scandinavian MNEs in China as a group was found to be appropriate for the purpose and

time frame of our research. Moreover, we are aware that our focus on five selected theories

excludes other theories which could have been analysed in connection with our topic.

Furthermore, our thesis only covers some of the factors which may influence entry and

expansion decisions. For example, solely asset specificity is derived from Transaction Cost

Theory while there are other dimensions which could have been included. Also,

measurements of variables vary across different studies. This means that our results are

reflected by our specific sample choice and measures of variables.

Lastly, we decided only to focus on entry mode and expansion decisions and not on

decisions concerning the establishment mode of Scandinavian MNEs in China. This means

that it is not in our scope to investigate whether these MNEs establish themselves in China

through a greenfield investment or an acquisition in the market. The reasoning behind this

is that these two decisions are made independently from each other (Brouthers & Hennart,

2007). Delimitations of this thesis are further discussed in later chapters.

1.4 Thesis Disposition

In order to explore, analyse and finally answer the research question presented above, this

thesis is divided into the following chapters:

In the next chapter, a thorough literature review on entry mode and expansion theories is

conducted. This review builds the basis of our conceptual framework. The chapter is

divided into different sections. First, classical entry mode theories are reviewed, namely,

the Eclectic Paradigm (OLI), the Resource-Based View (RBV), Transaction Cost Theory

(TCT) and Institutional Theory (IT). The next part is mainly focused on research regarding

the institutional environment in China. Following that, other entry mode studies related to

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cultural distance are regarded. In addition, the localisation versus globalisation issue,

which many multinational companies face, is reviewed. In the next sub-chapter, different

types of entry modes are reviewed. Thereafter, an expansion framework of firms in China

is presented. The literature review closes with the presentation of our conceptual

framework.

Chapter 3 focuses on the methodological framework of this thesis. First of all, the research

purpose, operationalization and scientific perspectives are outlined. This is followed by a

description of our data collection method which includes a presentation of our sample,

variables and logistic regression model. Finally, critical reflections of our chosen

methodology are discussed.

In chapter 4, empirical results from our quantitative part are presented. After that, the

regulatory environment of China is reviewed through an interview with the Global Law

Office. Thereafter, our three case companies, namely IKEA, H&M and Grundfos are

introduced.

In chapter 5, findings of both the quantitative and qualitative parts are analysed and

discussed. The latter includes an analysis of the interviews conducted with our case

companies. The overriding research question is answered and our findings are connected

to previous findings and theories presented in the literature review. Finally, a comparison

is done between the quantitative and qualitative parts.

Chapter 6 presents conclusions, contributions and future implications which are drawn

from the results of this study. The last chapter presents limitations of our research.

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2. Literature Review

First, traditional theories in entry mode research are analysed in order to explore factors

that generally influence entry mode decisions of Scandinavian companies in China. In the

second part of this chapter, expansion theories are explored to find out which factors

influence these companies once they have entered the Chinese market. Consequently, this

also lays the foundation for an analysis of the challenges and opportunities that firms

might encounter when or after having entered China. The chapter ends by outlining our

conceptual framework.

2.1 International Entry Mode Decisions and Theories

A substantial part of literature in international business is dedicated to the

internationalisation of firms and the reasons behind entry mode decisions. As a matter of

fact, entry mode research is the third most researched field in international business

(Werner, 2002). This points to its high importance for firms that enter new markets. The

entry mode decision is essential for the success or failure in a new market. Therefore, it is

critical to the future performance and the company’s vision in a long-term perspective

(Agarwal & Ramaswami, 1992; Anderson & Gatignon, 1986; Hill et al., 1990; Sharma &

Erramilli, 2004). An entry mode can be defined as a structural agreement which makes it

possible for a company to carry out its product or service strategy in a foreign market. This

happens either through marketing operations and exports or by having both marketing

operations and production located in the foreign country. The latter option can be carried

out by the firm by itself through a WOS or in a partnership by forming for example a JV

(Sharma & Erramilli, 2004).

A wide array of theories has been used to explain different entry mode decisions.

According to Brouthers and Hennart (2007), four theories, namely the Eclectic Paradigm,

Transaction Cost Theory, the Resource-Based View and Institutional Theory, have been

used the most in entry mode research. Early studies have mainly focused on entry mode

choices of firm in the manufacturing industry, and it has been argued that entry mode

decisions differ depending on what type of industry a company is operating in. (Brouthers

& Hennart, 2007).

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Many different internal and external factors, called determinants of entry modes (Werner,

2002), have been shown to influence entry mode decisions of multinational companies.

These determinants include country-specific factors, firm-specific factors, factors related

to transaction costs and factors specific to the industry of the multinational enterprise

(Werner, 2002; Pan & Tse, 2000; Anderson & Gatignon, 1986; Brouthers & Hennart,

2007). While country-specific factors take for example differences in cultural or the

institutional environment of the host country into account, factors specific to the company

can for instance be related to its characteristics, resources and strategies. Industry-specific

factors are for example determined by the competitive landscape in the host country which

may also affect the internationalisation strategy of a firm (Werner, 2002; Brouthers &

Hennart, 2007). Brouthers and Hennart (2007) outline that it is important to understand

that an entry into a foreign market is a multilevel phenomenon where many different

variables, which originate from several theoretical perspectives, complement each other. In

the following sections, selected entry mode theories are looked upon. Thereafter, one

selected expansion strategy is addressed to shed light on the less investigated field of post-

entry research.

2.1.1 The Eclectic Paradigm

The OLI framework or Eclectic Paradigm, developed by Dunning (2000), is one of the

most commonly used frameworks when it comes to explaining internationalisation

activities of multinational companies. A variety of different economic theories are part of

the paradigm. At the core, it explains that firms engage in FDI when ownership, location

and internalisation advantages are jointly present (Peng & Meyer, 2011). This means that

the entry mode choice is determined by these three factors (Dunning, 1993). First of all,

ownership advantages (O) are not location-bound and thus transferable on a global scale.

They help the company gain a competitive advantage and overcome the liability of outsider

ship in a foreign market (Peng & Meyer, 2011). In addition, they are connected to costs,

benefits and the control of relationships inside the firm (Canabal & White, 2008).

Ownership advantages vary greatly and range from tangible assets like technology, to more

intangible assets such as the company’s culture (Peng & Meyer, 2011). Moreover, they are

always considered in relation to the competitors of the company in the foreign market

(Dunning, 2000). Secondly, location advantages (L) are connected to the host country and

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thus the geographical location which the multinational enterprise targets. The location

should offer distinct advantages compared to the home market in order for the firm to

compete successfully in the new market and create value (Peng & Meyer, 2011). Availability

of certain resources and the commitment and costs of these resources are embedded in this

parameter of the OLI (Canabal & White, 2008). This signifies that location-specific

advantages are for instance related to the access to raw materials or human resources in

the host country. It is emphasised that location-specific factors become increasingly

important as firms expand in a country (Dunning, 1988). Thirdly, when the MNE decides

to keep its activities in-house instead of externalising them, internalisation advantages (I)

can be generated. This means that market transactions are not used by the company

because transaction costs are higher than internal coordination costs in this case (Peng &

Meyer, 2011). The main goal is to reduce coordination and transaction costs and therefore,

generate internalisation advantages (Canabal & White, 2008). Transaction costs are

especially prevalent “when a good or service is transferred across a technologically

separable interface." (Williamson, 1981, p.552). Moreover, firms should consider to keep

their core business in-house to avoid a knowledge loss. This concerns its ownership-

specific advantages such as innovations or technology (Peng & Meyer, 2011).

Overall, the Eclectic Paradigm has to be regarded in its specific context in terms of country,

industry and the company’s motivation for internationalisation (Dunning, 2000). Thus,

the three factors outlined above (ownership advantages, location advantages,

internalisation advantages), are determining for every company that decides to enter new

markets (Dunning, 2000). Based on these arguments, the Eclectic Paradigm is highly

relevant in the search for determining entry mode factors of Scandinavian companies in

China.

The framework has also been subject to criticism despite its success as an overriding

framework in international business. The Eclectic Paradigm has been criticised for not

being flexible or dynamic enough to take into account the continuous changes of MNEs.

Also, it does not address the role of managers inside these firms (Johanson & Vahlne,

1977). Furthermore, it is not clear how the different sub-paradigms are interrelated as well

as how they can be measured. The role of external policies and their interplay with the

internationalisation process is also not considered (Devinney et al., 2003). As analysed

17

later, especially in the context of China, these policies and regulations play a determining

role. The framework’s applicability to non-manufacturing firms has also been questioned

(Dunning, 1989) and its continuous extension has raised complexity. This has led

researchers to question the necessity of the paradigm’s development and scholars have

demanded to return to the roots of the OLI framework (Narula, 2010). Dunning (2000)

addressed this criticism by stating that his Eclectic Paradigm is still valid and powerful.

2.1.2 The Resource-Based View

The Resource-Based View is another essential and commonly used theory in entry mode

and strategy research. It has developed continuously since the 1980s (Barney, 1991; Sun &

Tse, 2009; Wernerfelt, 1984). It is indirectly incorporated in the OLI framework and it can

be used as a basis to understand and analyse the ownership advantages of a firm.

Resources of a firm are tangible or intangible assets that are closely connected to the

company itself (Caves, 1980). A bundle of resources that a company has collected (Sun &

Tse, 2009) comprises assets, knowledge and capabilities which can enable the firm to

improve efficiency and effectiveness of its operations (Barney, 1991). Resources are for

example brand names, specific knowledge, technology, capital or human resources

(Wernerfelt, 1984). The Resource-Based View complements other schools like the

Transaction Cost Theory (Williamson, 1985), that is drawn upon later, or an analysis on an

industry level (Porter, 1980). In this way, the RBV shifted the attention from external

market and industry factors to the firm’s internal factors and resources.

The resource-based framework was originally developed by Barney (1991) and it entails

that competitive advantages can only be sustainable if they are valuable (V), rare (R) and

not imitable (I) at the same time. Capabilities and resources are considered rare, if

relatively few firms possess them (Barney, 1991). Organisational capabilities (O) of a

multinational firm play an essential role in the analysis of ownership advantages as well.

These capabilities determine ‘‘what broad-based, heterogeneous factors are critical to

business success” (Roth & Jackson, 1995, p. 1721). If resources and capabilities are not

managed effectively, a competitive advantage cannot be sustained abroad in the long-run

(Peng, 2008). The so-called VRIO framework, is at the centre of this perspective which

emphasises the importance of capabilities and resources of companies (Keillor & Kannan,

2011). Furthermore, Brouthers and Hennart (2007) also suggest that companies should

18

develop resources to compete successfully in foreign markets. At the same time, firms can

make use of international operations by developing and extending resources through their

experience abroad. When adopting this view, it is essential to look at firm-specific

resources in a contextual perspective. Resources can unleash a different potential or value

depending on the market the firm operates in. While resources in one market or industry

can be valuable, this is not necessarily the case in another market (Barney, 2001).

Overall, the Resource-Based View unveils the importance of internal factors for the

successful entry into a new market. It underlines that a firm can sustain in a new market if

its internal capabilities match the external environment of the host country (Conner, 1991).

In this regard, the internal factors and ownership advantages of Scandinavian firms in the

Chinese market can also be considered crucial to their entry and expansion in a new

country as well as to their success or failure in the market.

2.1.3 Transaction Cost Theory

Transaction Cost Theory (Williamson, 1985) has been used to the largest extent among

scholars in entry mode research (Brouthers & Hennart, 2007). The theory mainly focuses

on the way in which firm- and industry specific factors affect the entry mode decision

(Makino & Yiu, 2002). Several studies have found evidence that Transaction Cost Theory

plays an important part in explaining entry mode choices of companies (Neupert &

Makino, 2000; Williamson, 1985; Hennart, 1991). According to Hennart (1991), the theory

assumes that “… the choice between full and partial ownership will depend on the costs

and benefits of sharing ownership (joint ventures) relative to those of full ownership

(wholly-owned subsidiaries)” (Hennart, 1991, p. 484). Brouthers (2002) means that

several scholars (Makino & Neupert, 2000; Agarwal & Ramaswami, 1992; Williamson,

1985) have described transaction costs as costs which involve monitoring the performance

of firms and negotiating with a suitable partner. Williamson (1985) suggests that

transaction cost economies are characterised by behavioural assumptions related to

bounded rationality and opportunism. These behaviours are influenced by the complicated

attributes of transactions. Bounded rationality relates to how rationality is intended but

also limited by economic actors. Opportunism refers to self-interest seeking behaviour,

where information from another party is distorted or incomplete.

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In Williamson’s (1985) theoretical framework of transaction costs, three dimensions are

believed to describe different types of transactions, namely, asset specificity, degree and

kind of uncertainty as well as frequency of transactions. To begin with, asset specificity,

which is often considered to be the most important factor, is described as “… the degree

to which an asset can be redeployed to alternative uses and by alternative users without

sacrifice of productive value.” (Williamson, 1989, p. 142). Williamson (1989) made five

distinctions of asset specificity, namely site specificity, human asset specificity, physical

asset specificity, brand name capital and dedicated assets. The concept of asset specificity

was originally developed by Williamson (1985) to describe vertical investments, where

customers or suppliers have to make specific investments to buyers. The opportunistic

behaviour that occurs after the investment has been made is related to a product’s price,

which the other party may want to change to its advantage. In order to avoid these

situations, contractual agreements are used to specify the price and length of transaction-

specific investments (Brouthers & Hennart, 2007). Transaction Cost Theory assumes that

a high level of asset specificity is associated with high control modes of entry, such as WOS,

however past studies have found mixed support for this prediction. Differences in the

definition of asset specificity may explain the variations in results. Most studies have used

R&D intensity while some studies have used for example human or technology asset

specificity as a measure for asset specificity (Brouthers & Hennart, 2007). Transaction cost

research, related to asset specificity, has not only focused on vertical investments, but also

on horizontal investments which are made to exploit for example knowledge or innovation

developed in another market. Depending on the degree of asset specificity, MNEs decide

between licensing and integration, where the former is chosen when asset specificity is low

and strategies such as WOS or JV, are chosen when it is high (Brouthers & Hennart, 2007).

The dimension of Transaction Cost Theory, namely uncertainty, relates to the degree of

unpredictability with which transactions are associated (Williamson, 1985). This can be

difficult to specify in a contract (Brouthers & Hennart, 2007). Different governance

structures vary in their capabilities of dealing with disturbances in an effective way. These

differences depend on the existence of bounded rationality (Williamson, 1985). According

to Williamson, uncertainty is problematic only when switching costs are high and there are

few possible buyers and sellers. Contracts then become less efficient and may lead to

holdup of the other party (Brouthers & Hennart, 2007). Cultural distance and country risk

20

are two factors which have often been used by scholars to determine the level of external

uncertainty. However, the way in which these factors have been measured have differed to

a large extent. Internal uncertainty has often been measured in terms of experience in the

host market, worldwide or measured as total number of foreign investments. Researchers

have reached mixed results when it comes to the level of uncertainty and its effect on entry

mode choice (Brouthers & Hennart, 2007).

The third dimension of Transaction Cost Theory, namely frequency, refers to the

capacity of governance structures to handle a certain volume of transactions (Williamson,

1985). Frequency influences a firm’s transactions in the way that a company should choose

certain boundary expansion strategies only if the number and volume of transactions are

large enough to justify the costs related to them (Brouthers & Hennart, 2007).

Transaction Cost Theory has been subject to criticism because it omits variables which may

be important when making an entry mode decision (e.g., Chi & McGuire, 1996; Gomes-

Casseres, 1990; Kim & Hwang, 1992; Reuer & Tong, 2005). That is why different

researchers supplemented this theoretical construct with key ideas from Institutional

Theory. This approach should close the apparent gap which Transaction Cost Theory

displays in its explanation of entry modes decisions (e.g., Davis et al., 2000; Lu, 2002).

Based on these findings and its importance in entry mode literature, Institutional Theory is

outlined in the following section, to complement Transaction Cost Theory.

2.1.4 Institutional Theory

Research on Institutional Theory proposes that a market’s institutional environment

influences the boundary decisions of companies and sets the “rules of the game”

(Brouthers & Hennart, 2007, p. 405) in a certain market (Brouthers & Hennart, 2007).

When related to foreign entry modes, the theory focuses on influences from institutional

forces. These are embedded in a country’s institutional environment and cognitive

constraints of decision makers, when it comes to new expansion (Makino & Yiu, 2002).

Institutional Theory has been studied from different perspectives. In regards to the firm’s

boundary choice, institutional research has mostly been focused on the institutional

environment in the host country or variations in the environment between the home and

the host market, and the way these differences may affect the entry mode decision

21

(Brouthers & Hennart, 2007). Institutional Theory seems to point to the suggestion that a

company’s ability to exploit and upgrade its capabilities differs depending on the

institutional environment of a nation (Brouthers, 2002). North (1991) defined institutions

as “humanly devised constraints that structure political, economic and social interaction”

(North, 1991, p.97) and he claimed that they include both informal constraints as well as

formal rules in a society (North, 1991). Examples of the former are customs, traditions and

codes of conduct whereas laws, property rights and constitutions are examples of the

latter. According to North (1991), the role of institutions is to reduce uncertainty and

thereby to create order. Institutions also create an economy’s incentive structure and as

this develops, the direction of economic change is formed towards growth, decline or

stagnation. By reducing transaction and production costs, benefits from from trade can be

realised (North, 1991). Institutions influence the performance of the economy by their

effect on production and exchange costs. North (1990) means that his theory of institutions

is a result of a mixture of Transaction Cost Theory and a Theory of Human Behaviour.

Institutional frameworks present organisations with certain opportunities, and certain

skills are promoted by the shape of an economy. In turn, these skills will form the direction

of development and progressively alter the institutional framework (North, 1990).

As economies evolve, the institutional environment also changes and develops (North,

1991). Entry mode performance can be significantly affected by the institutional context in

a market since it influences the way in which organisational capabilities can be used (Davis

et al., 2000). Lu (2002), investigated the way in which entry mode choice is affected by

institutional influences compared to transaction-cost associated influences. The results

showed that institutional influences have a significant impact on international strategy

formulation and implementation (Lu, 2002). Brouthers (2002) conducted a study which

examined the connection between firm performance and entry mode choice. An extended

transaction cost model was developed where cultural and institutional variables were used

in addition to efficiency variables including asset specificity and general transaction costs.

The research found that entry mode decisions matter in regards to performance. It also

found that companies which based their entry mode decision on the extended transaction

cost model, performed better than companies which based it on other types of modes

which did not account for these factors. In other words, the study found that entry mode

decisions are influenced by a mixture of institutional and cultural variables as well as the

22

nature of transaction costs. In terms of institutional context, the study found support that

companies which enter markets characterised by a higher degree of legal restrictions tend

to use JV rather than WOS as mode of entry (Brouthers, 2002).

New Institutional Theory (NIT) has also been adopted by researchers in order to explore

what institutional factors should be taken into account in entry mode studies (Brouthers &

Hennart, 2007). Scott (1995), focuses on the “new” institutionalism and means that

differences exist in nations’ institutional environment and that institutions might be

cognitive, regulative or normative. Cognitive institutions focus on common and highly

ingrained understandings of social reality, regulative ones on the creation and enforcement

of rules and normative ones on shared moral understandings (Scott, 1995). Another

example of this new path of research related to entry modes and Institutional Theory, is a

paper by Yiu and Makino (2002). The study, which is further discussed in chapter 2.1.6.1,

investigates the effect of cognitive, regulative and normative influences on entry mode

decisions while controlling for transaction cost-related influences (Brouthers & Hennart,

2007). The paper concludes that Institutional Theory provides foreign entry mode

decisions with additional explanatory power and thereby supplements Transaction Cost

Theory. Moreover, cognitive, regulative and normative dimensions of the institutional

setting, are all found to influence entry mode decisions (Makino & Yiu, 2002).

The level of economic and political risk in a host country, is the perspective of the

institutional environment which has been explored the most in conceptual and empirical

papers on entry mode decisions (Delios & Beamish, 1999). Delios and Beamish (1999)

investigated the ownership strategy of Japanese firms in Asia. The paper found that

international experience and the institutional environment were the two factors which

influenced the selected entry mode the most. In addition, transactional factors were shown

to have a much lower influence on the chosen ownership strategy (Delios & Beamish,

1999). A study by Hill et al. (1990), developed a framework which identified underlying

factors which affect entry mode choices. The paper suggests that when host country risk is

high, MNEs may reduce their exposure and lower their transaction costs by choosing

modes with lower resource commitments. The reason is that a lower control mode, such as

JV, gives MNEs an opportunity of leaving the market faster, compared to in a mode of

higher commitment, such as WOS (Hill et al, 1990). Similarly, other studies have found

23

support that political risks, such as expropriation (Bradley, 1977), can be limited by

lowering the ownership commitment in the host country by for example sharing the

ownership with a local partner (Hennart, 1988; Bradley, 1977). Corruption can be seen as

another type of political risk and Uhlenbruck et al. (2006), studied the impact of

corruption on entry strategies in emerging markets. The research found that corruption

had a significant effect on entry mode decisions. For instance, a JV is preferred over a WOS

in corrupt markets, however that is just when arbitrariness is high (Uhlenbruck et al,

2006).

In regards to intellectual property rights (IPR) protection, most studies in this area have

focused on the way it affects the nature of FDI and not as much on the way it influences

different ownership structures (Delios & Beamish, 1999). The study by Delios & Beamish

(1999), found that Japanese firms undertook higher levels of ownership structures in

countries where intellectual property rights were weaker. These findings are in line with

arguments by Williamson (1996), where he argues that an institutional environment with

weaker property rights increases the cost of using a lower control mode. This increases the

risk of leakage of proprietary assets to competitors.

Overall, the review on Institutional Theory shows that the institutional environment

influences firms’ entry mode choice. A higher degree of uncertainty such as increased host

country risk seems to lead to the choice of a lower ownership commitment in the host

country. The review also shows that the theory complements Transaction Cost Theory. The

next section looks into China’s institutional environment.

2.1.5 China’s Institutional Environment

An industry’s competitive structure and its options available to MNEs are influenced by

host governments and national policies. Prahalad and Doz (1987) mean that MNEs can

increase their bargaining power towards host governments by taking on a global

integration strategy. However, the scope for coordination and integration is often limited

by host governments and these may have certain demands in terms of local

responsiveness. For instance, these could be related to protection of the national

development or issues related to national security (Prahalad & Doz, 1987).

24

Several scholars have examined how MNEs interact with governments in China (Chen,

2007; Child et al., 2003; Child & Tse, 2001). The government plays a salient role in China’s

business environment and economic development. The institutional environment has gone

through several reforms which have influenced the level of uncertainty of foreign

companies in China. As the country’s institutional environment develops towards

privatisation, transaction and information costs as well as foreign companies’ dependency

on local partners and the government, are expected to decrease. In addition, more

transparent rules and an increased enforcement of IPR is expected to reduce the resource

dependency between home and host country players in the market. In regards to entry

mode strategies, this means that the decision of entering through a JV will be less

determined by a company’s ties to the government. They will be more determined by

rational considerations and strategic factors such as competitive advantages and resource

complementarity in the local market (Child & Tse, 2001). However, the performance of

firms has been shown to depend on their ability to adjust their objectives to shifts in the

institutional environment (Chen, 2007). Institutional limitations have in the past

prevented foreign companies from taking forceful legal action against piracy (Child & Tse,

2001). In China, different levels of governmental hierarchy create regulations and laws

which differ depending on the industry and authority that a company is subject to (Child et

al, 2003). Chen (2007) studied the topic in relation to MNE’s strategic management of

government affairs in the Chinese market. The Chinese government, which operates under

an authoritarian political system, has a very large degree of power in all aspects of society

and this greatly affects the business environment of MNEs. In addition, the government in

China has a very complex structure and regulations differ across industries (Chen, 2007).

Regulations concern different areas of doing business in China as for example localisation,

geographic coverage or restrictions on distribution. They have largely influenced the

strategies of MNEs including market orientation, human resources and financial

management (Beamish & Jiang, 2002; Luo, 2000). However, barriers to entry and other

regulatory hurdles have also been relaxed. Especially when it comes to WOS and foreign

ownership, China has opened up more industries to foreign investment. Previously

restricted sectors, such as the retail industry, are not tightly regulated anymore in terms of

entry mode choice, partner selection or location of entry (Luo, 2007).

25

The success of MNEs in regulated and fast changing industries is believed to be explained

by their ability to quickly adjust their strategies to changes in government policies or the

regulatory environment in the nation. In more stable industries, communication and work

towards enhancing relationships with the Chinese government and local partners are

important factors in reducing governmental barriers of MNEs’ operations. The need for

constant interaction with the government increases with the degree of regulation in the

industry. The characteristics of the political system and economy of China makes it

essential for MNEs to interact with the government in order to deal with threats and

opportunities in their surroundings (Chen, 2007). When emphasising the institutional

environment of China based on Transaction Cost Theory and Institutional Theory, we

acknowledge that other environmental factors of the Chinese market also play a major role.

This includes for instance macroeconomic, political-legal or demographic determinants

(Luo, 2007).

2.1.6 Other Entry Mode Theories

In the following section, other entry mode theories are introduced in order to complement

the previously examined the theories. The following two theories are reflected in the

chosen variables of the conceptual framework, which can be found in chapter 2.4.

2.1.6.1 Cultural Influences on Entry Mode Decisions

Cultural influences on entry mode choice have been studied by an array of scholars (e.g.

Yiu & Makino, 2002; Agarwal, 1994; Kogut & Singh, 1988; Makino & Neupert, 2000).

Agarwal (1994) states that it is extensively believed that companies which face high socio-

cultural distance, choose JV as their entry mode. Not only have cultural influences on entry

modes been studied, but also the nationality of MNEs and its impact on this decision

(Erramilli, 1996). In order to measure national and cultural differences, Hofstede’s (1980)

cultural indices have been used by various scholars (Makino & Neupert, 2000; Erramilli,

1996). Hofstede (2001) identified four different cultural dimensions, namely uncertainty

avoidance, power distance, masculinity vs. femininity and individualism vs. collectivism.

Firstly, uncertainty avoidance refers to the extent to which ambiguity and uncertainties

in the future are accepted by society (Hofstede, 2001). This is an important trait of MNEs

that move to unexplored markets. Secondly, power distance relates to the unequal

distribution of power in society and to what extent this is accepted (Hofstede, 2001). This

26

implies that companies from countries with a high power distance would prefer to choose

an entry mode where higher control can be exerted. Thirdly, masculinity vs. femininity

expresses that some cultures put a stronger focus on traits like competitiveness or

assertiveness while others dominantly stress cooperative and caring values (Hofstede,

2001). More “masculine” countries would for example have a preference for entry modes

with a higher risk, which is rooted in the prevalence of their values. Lastly, the dimension

individualism vs. collectivism describes whether individuals are more closely

connected to their families and concerned with themselves or if they are loyal to groups in

society (Hofstede, 2001). This can also affect entry mode decisions. National differences in

culture are obtained from differences in these scores (Hofstede, 1980). Later, a fifth and a

sixth dimension, namely long-term vs. short-term orientation (Hofstede, 1991) and

indulgence vs. restraint were identified and added to the framework (Hofstede et al.,

2010). However, we do not focus on these newer dimensions in this thesis.

Yiu and Makino (2002) investigated the impact of cultural influences on entry mode

choice. The results suggest that entry mode choices are influenced by the normative factors

cultural distance and ethnocentricity. However, regulatory forces such as legal restrictions

and sanctions, and cognitive forces originating from for example MNEs historical entry

mode patterns, were shown to be more critical in their impact on entry mode choice. A

possible explanation for this is that normative factors take longer to observe and cannot be

as easily identified as the other factors before operations start in the host country. In

addition, it takes longer for MNEs to build up normative legitimacy in the value systems of

locals compared to establishing regulative and cognitive legitimacy (Yiu & Makino, 2002).

Similarly, Kogut and Singh (1988), tested the effect of national culture on entry mode

choice, and found empirical support that there is a relationship between cultural aspects

and the entry mode choice of a company. When the cultural distance between countries is

large, there is a higher probability that a firm will enter through a JV rather than through a

WOS. Moreover, their study concludes that institutional and cultural factors should to be

taken into account in transaction cost models, which are used to explain entry mode

choices (Kogut & Singh, 1988). Even though Kogut and Singh’s (1988) cultural distance

index has been frequently used in previous studies, the method has received criticism in

regards to its conceptualisation and methodological properties of measuring cultural

distance (Shenkar, 2001).

27

Overall, several scholars have found support that cultural aspects, particularly the cultural

distance between the home and the host country, influence a firm’s entry mode choice. In

the next section, the choice between localisation or globalisation strategies in a foreign

market is reviewed.

2.1.6.2 Localisation and Globalisation Strategies

A company with extensive international presence is likely to follow a strategy that operates

on a worldwide level. However, it has been argued that companies will perform better by

following a regional strategy in addition to, or as a substitute to, a global strategy

(Ghemawat, 2005). Ghemawat (2005), means that successful global companies seem to

have realised that geographical distinctions are becoming more and more important.

Moreover, they have understood that focusing on a regional strategy as well as a local and

global strategy can lead to better company results. Regionalisation does not only mirror

the significance of geographic proximity, but also the importance of administrative,

cultural and to some degree, economic proximity. Although creating regional strategies is

important, the implementation of these can take a while. This can be explained by the fact

that the current structure of the firm may not be in line with a regional strategy, and

decision power may need to be reallocated within the company (Ghemawat, 2005).

Companies with operations around the world may face challenges when it comes to

effectively controlling foreign operations, how to implement global strategies or how to

strategically respond to differences across markets. In addition, companies may need to

modify its regional strategy to the Chinese market as it is different from other countries in

the region in terms of the competitive environment.

Consumer preferences which are particular to the host country and local market structure

have always been reasons for obstacles to globalisation. Some firms for example try to deal

with these differences by creating standardised products worldwide, while others try to

meet local preferences by differentiating products across markets (Bartlett & Ghoshal,

2002). The degree to which companies’ foreign subsidiaries respond to local demands or

competition is known as local responsiveness. The pressures of local responsiveness and

global integration of activities originate from the economic, competitive and technological

nature of a business (Prahalad & Doz, 1987). Bartlett (1986) discussed the forces of global

coordination/integration in relation to the forces for national

28

responsiveness/differentiation. He suggested that industries are often characterised by

differences in to what extent they respond to these forces. However, firms within any

industry also respond differently to these, usually contradicting, forces of local

differentiation and global coordination of activities. In order to achieve both local

adaptation and global integration, MNEs are suggested to follow a transnational strategy

(Bartlett, 1986). The degree of global integration versus local responsiveness has been

illustrated in a matrix by Bartlett and Ghoshal (1989). It includes four types of strategies as

shown in figure 1. The strategies vary in the level of control and influence which a parent

company has on its local subsidiaries, and their degree of operational autonomy in the

foreign market (Bartlett & Ghoshal, 1989).

Figure 1 - Matrix of Global Integration versus Local Responsiveness (adapted from Bartlett

& Ghoshal, 1989).

The decision making power of subsidiaries may vary and flexible relationships between

subsidiaries and headquarters are needed in order to make the strategic decision process

follow competitive conditions in the market. In order for the headquarters to assign

different strategic tasks to subsidiaries in line with the overall global strategy, it needs to be

able to include the most important subsidiaries in the development of this strategy.

Nevertheless, the complexity of this relationship is influenced by host governments, which

should be seen as modifiers of the competitive characteristics of an industry (Prahalad &

29

Doz, 1987). The performance of affiliates in other markets can be improved by developing a

relationship which is characterised by confidence as well as close integration and control

between the parent and affiliate (Child et al., 2003). Luo (2001) examined determinants of

local responsiveness in the dynamic environment of the Chinese market, from a subsidiary

manager perspective. The study found that business culture particularity and

environmental complexity enhance local responsiveness where locally established

connections with the Chinese government and other businesses were shown to make local

responsiveness easier (Luo, 2001).

2.1.7 Motivation for Focusing on the Chosen Entry Mode Theories

As explained by Brouthers and Hennart (2007), a large amount of theories has been used

in literature to analyse entry mode choices. We are aware of the fact that theories such as

Control Theory, Bargaining Power Theory, and Agency Theory have also been used to

explain entry mode choices (Brouthers & Hennart, 2007). However, the focus of this

literature review and the later developed conceptual framework is on the four most applied

entry mode theories; the Resource-Based View, Institutional Theory, the Eclectic Paradigm

by Dunning and the Transaction Cost Theory. In addition, the Evolutionary Process of

Global Market Expansion (Cui, 1998), is included as an expansion theory. We chose to

build upon these classical theories and main theoretical concepts because of their

theoretical quality, continuous and extensive usage in entry mode literature in the past

decades. Furthermore, in combination with the internal and external factors extracted

from research, the theories are considered suitable to meet the objective of this thesis by

unveiling influencing entry mode factors.

When regarding the topic with various theoretical lenses, adapting a fragmented view,

which only concentrates on a single theoretical approach and solely provides partial

explanations, is avoided. A great part of entry mode and internationalisation literature

focuses on one-sided theoretical constructs which do not provide a holistic perspective on

the complex entry mode phenomenon. Some scholars tried to remedy this one-sided view

(Hill et al., 1990, Brouthers & Hennart, 2007, Morschett et al., 2010). As outlined in

previous chapters, some of the chosen theories also complement each other and

specifically address weaknesses of each other, as for instance the Transaction Cost and

Institutional Theory (Puck et. al., 2009).

30

2.2 Types of Entry Mode Strategies

Once a company has decided to enter a foreign market, a decision regarding its entry mode

has to be taken (Hill et al., 1990). According to Pan and Tse’s (2000) hierarchical model of

entry modes, a distinction between equity-based and non-equity-based entry modes is

drawn. This is based on, whether an equity investment is executed or not. Equity-based

entry modes are differentiated between WOS and JV while non-equity based entry modes

are either contractual agreements or exports to the host country. The entry modes can be

broken down even further as shown in figure 2 (Pan & Tse, 2000). When taking on this

view, entry modes are examined from a hierarchical perspective (Kumar & Subramaniam,

1997).

Figure 2 - A Hierarchical Model of Entry Mode Choices (Pan & Tse, 2000, p.538)

The entry modes presented in figure 2 have different underlying implications. These

concern for example the foreign resource commitment, the level of control in regards to its

31

operations in the foreign market and the level of dissemination risk when expanding to a

new market. This implies, that the decision regarding the appropriate entry mode is indeed

a complex and difficult one to make (Hill et al., 1990). It is also critical to the success of the

operations abroad (Davidson, 1982; Killing, 1982, Root, 1987). On the one hand, equity-

based entry modes are characterised by a high level of resource commitment through the

direct investment in foreign operations (Anderson & Gatignon, 1986) and the

establishment of an independent operation. This operation has to be managed

continuously and interacts constantly with local parties (Hill et al., 1990). On the other

hand, non-equity entry modes do not require the setup of an autonomous organisation.

Agreements and relationships between stakeholders are defined and fixed in contracts.

Consequently, the two main entry mode categories in the hierarchical model differ greatly

in terms of resource commitment in the foreign market, control over operations, risk and

other characteristics (Pan & Tse, 2000). This hierarchical model adopts the view that

different factors are taken into account on various levels. In turn, it explains more precisely

how entry modes are affected by different variables on different stages in the decision

process. At the first decision level, macro-level and country variables are decisive. This is

not the case in the lower hierarchical levels (Pan & Tse, 2000).

The entry mode choice which has been studied the most by different scholars is the one

between a JV and a WOS (Brouthers & Hennart, 2007). This is due to the importance and

dominance of these two entry modes of MNEs into the Chinese market. Before 1997, JVs

were the most commonly chosen entry mode into China. This was also rooted in

regulations imposed on foreign companies which required them to enter with a Chinese

partner. Following that, WOS were used more frequently as a mode of entry into the

Chinese market (Yan & Warner, 2002). Many MNEs also changed their initial entry

strategy from a JV to a WOS due to the changes in regulations (Puck et al., 2009). Based

on this information, the focus of this thesis is put on these two entry modes, mainly in the

quantitative part. Hill et al. (1990) developed a framework to characterise these two entry

strategies among others. In their paper, it is argued that international business literature

focuses mainly on three different entry modes: licensing, WOS and JV. This is a strong

simplification of the hierarchical model by Pan and Tse (2000), which examines entry

modes from a different angle and in greater detail. The two chosen entry modes are looked

32

upon and defined regarding its different levels of control, resource commitment and risk as

framed by the eclectic theory of Hill et al. (1990).

2.2.1 Wholly Owned Subsidiary

A WOS is fully owned by the parent company and not shared with another partner, as for

example a JV (Miller, 1998). By choosing this entry mode, parent companies can exert the

highest level of control over its operations compared to all other entry modes. This means

that a high level of authority over decisions on an operational and strategic level can be

executed. Hill et al. (1990) emphasised that the corporate office of the MNE always has the

ultimate control, although some authority over daily operations and few strategic decisions

might be delegated to foreign subsidiaries. When it comes to resource commitment, the

entry mode WOS requires a high level of investments. This signifies that dedicated tangible

or intangible assets cannot be used alternatively without the occurrence of costs. On the

one hand this means that sunk cost can pose a risk if foreign operations are not successful.

On the other hand, the dissemination risk is relatively low compared to other entry modes

because of the high level of control which the MNE has over its foreign operations. This

makes it difficult for partners or competitors to assimilate technology or knowledge (Hill et

al., 1990).

2.2.2 Joint Venture

A JV can be defined as a commercial agreement between two or more parties in order to

cooperate and achieve a mutual goal. It is considered a strategic alliance and if chosen as

an entry mode, it becomes an essential part of the international expansion of a firm

(Lopez-Navarro et al., 2013) and is therefore a major strategy in expansion (Kogut, 1989).

In a JV, partners share assets, revenues and expenses and thus, the ownership of the

company (Gong et al., 2005).

JVs may display different levels of control depending on the contractual agreements. The

level of control differs depending on the split of ownership, the number of different

partners involved and the share of control between the parties. A JV mode of entry exerts a

medium level of resource commitment that again, strongly depends on the partner relation

and contractual settings. Compared to a WOS, a JV has a higher risk of dissemination

which is rooted in the partnership relation to a local company. The latter involves the risk

33

that partners absorb knowledge and technology and disseminate know-how or use it for

different purposes (Hill et al., 1990). The entry mode can therefore be seen as a means to

access resources and knowledge embedded in another firm (Kirby & Kaiser, 2003).

2.2.3 Other Entry Modes

Other entry modes can be found on the non-equity based side of the hierarchical model

and are not examined in greater detail in the following chapters of this thesis. These are for

example exports and contractual agreements such as licensing (Pan & Tse, 2000).

Exports are goods and/or services that are transferred across nations (Miller, 1998). While

the product and/or service is produced and developed in the home country, it is sold in the

host country, mostly through an entity there (Johnson & Tellis, 2008). Research has

suggested that before having gained experience in a foreign market, firms often use exports

as their entry mode (Brouthers & Hennart, 2007). This is in line with early

internationalisation theories which claim that, an early entry into a new market starts with

low-risk, “simple” entry modes. Moreover, this perspective supports the view that with

increasing experience and knowledge in the new market, there is a higher likelihood that

firms will engage in equity-based entry modes. This is especially the case with a growing

customer base and increased brand awareness in the new market (Philippe & Léo, 2011).

Contractual agreements and licensing are transactions which determine that the right to

control and use specific property, knowledge and assets is given to another organisation.

The partner is allowed to make use of the tangible and intangible assets, given certain

contractual conditions (Luostarinen & Welch, 1990). Dissemination risks are high and

control is low when taking on a licensing mode of entry. However, resource commitment is

also relatively low compared to equity-based entry modes (Chen & Messner, 2009; Hill et

al., 1990; Hill & Kim, 1988). Figure 3 (Dess et al., 2014), illustrates some of the most

important entry modes and their characteristics in terms of risk and investment level as

well as degree of ownership and control.

34

Figure 3 - Entry Modes for International Expansion (Dess et al., 2014)

2.3 International Expansion Theories

As examined in the previous chapter, a part of the firm’s international expansion is the

entrance into a new market. However, there is more to international expansion of

multinational enterprises than solely its entry mode decision. It also covers a firm’s further

expansion in the new market (Cui, 1998). According to various studies, expansion of

multinational firms can be considered as an evolutionary process. This signifies that

companies acquire more and more knowledge when operating overseas. They gradually

secure resources which are important to them and slowly adapt to the host country

conditions of doing business. In pursuing this, companies aim at improving efficiency,

gaining market share and increasing profitability (Douglas & Craig, 1989; Craig & Douglas,

1996a). Lambkin and Day (1989) suggest, that a key factor of a successful expansion is

related to the degree to which a company manages to match its resources with

environmental conditions in the host country. Also, the expansion process has various

facets and different operations of the firm are involved (Craig & Douglas, 1996b). As

outlined before, numerous studies have dealt with entry modes and many factors and

variables on a macro and firm-level have been identified as determinants. Other research

concentrates on expansion as a gradual process with a number of stages, which companies

35

go through (Johanson & Wiedersheim-Paul, 1975). In this process, firms constantly

develop their knowledge, which is essential in diminishing uncertainties and risk, as well

as in the determination of resource commitment (Johanson & Vahlne, 1977). When going

through different expansion stages, firms transform incrementally and their management

orientation might evolve and change, for example from multinational to transnational and

global or through similar stages (Perlmutter, 1969). Other studies primarily identified the

variables that influence global expansion. Thereby, the expansion process is often seen as

the dependent variable which is explained by a row of different factors (Cui, 1998).

According to Douglas and Craig’s (1989) framework, companies go through three stages

when taking on the evolutionary process perspective: first the market entry, then

expansion in the market and finally global rationalisation. Each of these stages is

characterised by different challenges and priorities. Internal and external determinants

called triggers make a firm enter a market. The direction of expansion, called strategic

thrust, and advantages specific to the firm and each stage (international levers) influence

the behaviour of the company. Johanson and Wiedersheim-Paul (1975) suggest similar

successive stages, namely entry, expansion and experienced. Different studies (Sun, 1999;

Osland & Cavusgil, 1996) support the validity of this view for multinational firms in China.

The activities of MNEs that internationalised to China, show that their expansion process

has different steps. It involves interaction between the firm, its structure, strategies and

global experience, with its external environment including the Chinese market, industry

and home country structure. A substantial learning process is at the core of this. Moreover,

multinational firms adopt various strategies to deal with challenges and targets specific to

each development stage in the Chinese market. Based on the theories outlined above, the

evolutionary perspective of global market expansion is examined in the following section in

order to provide a holistic understanding of the expansion process which MNEs go through

in the Chinese market (Cui, 1998).

2.3.1 The Evolutionary Process of Global Market Expansion

As outlined in the previous section, international expansion of multinational companies is

an incremental, sequential process of development and adjustment. Cui’s framework

(1998) builds on these theories and complements the different stages of expansion which a

firm goes through when entering and expanding in the Chinese market. Four different

expansion stages are proposed in his research and can also be seen in figure 4. In line with

36

previous research, he emphasises that every stage differs in terms of environmental

characteristics and challenges. These have an influence on the priorities and goals of the

firm (Cui, 1998).

Figure 4 - The Evolutionary Process of Global Market Expansion (adapted from Cui, 1998)

2.3.2 Preparation Stage

The initial stage, known as preparation, is an essential one in the expansion process. A lack

of knowledge about the host country and target market is ideally met with an analysis and

assessment of the new market environment. Pre-entry activities may include information

gathering, relationship cultivation and a thorough risk assessment. A transaction cost

analysis and a financial analysis are key as well. MNEs often face the problem of correctly

estimating demand in the Chinese market. The right place and time of entry are also

determining factors which have to be assessed. Many multinational firms spend a

considerable amount of time with research before they enter a market. This often involves

courting the government of China and key persons with banquets, free seminars or

training offers. All in all, a thorough research and preparation is essential before entering

the Chinese market (Cui, 1998).

2.3.3 Entry Stage

After having acquired more knowledge about the target market by doing research, the level

of estimated risk and uncertainty should be reduced, which in turn increases resource

commitment. In this phase, a decision regarding the firm’s entry mode is important as well

as the determination of the firm’s time and place of the entry. While it is possible to first

establish a representative office in the respective country, a lot of multinational firms enter

by directly investing in China. In this specific stage of experimentation and expansion,

MNEs learn to deal with Chinese bureaucracy and they establish relationships with

37

partners and the main governmental agencies in China. Furthermore, they navigate

through the jungle of regulations, obligations and other upcoming challenges to extend the

scope and scale of their business abroad (Cui, 1998). Although China is a very promising

market, this stage implies that the market is a rather challenging one as well. Many MNEs

have entered China and for some of them, this decision has turned out to be not satisfying

(Braun, 1989; Mann, 1989). This is for example rooted in declining sales, rising costs and

inefficiencies in the work force there (Cui, 1998).

2.3.4 Expansion Stage

An expansion decision is made or discarded based on the entry stage. This means that a

company commits more resources incrementally when it decides to expand. Upcoming and

changing external factors and a preceding success or failure of the firm’s entry, influence

the expansion decision. In this stage, MNEs tap into new geographic markets inside the

borders of China and they might identify new products to offer. Hereby, it becomes

essential to investigate and monitor economic trends, political events and the environment

in the host country in general. Firms have to search for market opportunities in order to

seize them. With expanding operations, new challenges come up which concern for

example negotiations to set up new operations, the establishment of a well-functioning

distribution network or new marketing strategies. Moreover, challenges concern for

instance sourcing, customer service or the search for qualified employees in a new

geographic area. So what role does the Chinese market environment play at this stage of

internationalisation? At the end of the 20th century, the Chinese market stabilised in

regards to foreign investment policies, regulations and possibilities for foreign companies

to profit from reforms. Back then, consumer demand and life conditions started changing

tremendously to the better in many parts of China. A higher pace of life made for instance

convenience products and new forms of entertainment more popular. Tariffs on some

foreign products were reduced which led to a higher demand (Cui, 1998). Although China

has experienced an economic slowdown, the country’s consumer economy is expected to

expand. Moreover, in the past few decades an emerging middle class has been established

(Kuo, 2016), together with an increasing demand for consumer goods and services which

has created opportunities in several industries (Perkowski, 2012). This opens up great

possibilities for expansion, however differences are big inside the country. Cui (1998)

emphasises a lot that there is not “one” China and that every Chinese region differs in

38

terms of demand, economic development, regulations, policies, infrastructure, distribution

and so on (Cui, 1998). These regional differences have to be taken into account when

assessing the expansion readiness as well as when planning and executing the final

strategy.

2.3.5 Experienced Stage

Multinational companies that have established themselves successfully in the foreign

market often control headquarters in China and have several operations in different

regions. At this stage of expansion, the foreign division should represent a significant part

of the company’s revenues on a global scale. Moreover, it should have become an essential

and irreplaceable part of the company’s strategy worldwide. New priorities emerge driven

by a higher presence and recognition of the brand. These may include a higher focus on

continuous innovation, defending and expanding the market share as well as increasing

competitiveness and/or penetration of the market. Over time, more and more companies

enter the market which increases competitiveness and the need to innovate and defend the

position in the market. Many multinational companies, including our case companies

IKEA, H&M and Grundfos have been in China for at least a decade (Jonsson, 2008;

Hellstrom, 2008; Grundfos, 2017a) and employ thousands of people (H&M, 2017i; IKEA,

2017c; Grundfos, 2017a). The growing workforce of many companies in China, implies that

an efficient human resources strategy is needed to attract the most qualified employees. In

order to operate and compete effectively, it is important to integrate and also coordinate

different operations in the Chinese market. This is crucial to ensure cost efficiency, a high

quality at low prices and sufficient supply. The coordination and integration of activities

can pose a several challenge (Cui, 1998).

2.3.6 The Evolutionary Perspective as an Expansion Framework of

Multinational Companies in China

Overall, the Evolutionary Process of Global Market Expansion provides a framework of

different strategic stages and transitions which MNEs go through in the expansion process

in the Chinese market. In this way it provides a basis for multinational companies in the

strategic decision making process. MNEs can derive guidelines for their expansion

planning process by using the framework as a tool. All in all, the framework emphasises

that it remains essential to monitor the market and adapt continuously to the ever-

39

changing market environment in China. In this way critical decisions regarding expansion

strategies can be taken. Thus, the incremental entry experience of MNEs and their

continuous acquisition of market knowledge, lead to a more sophisticated approach to the

Chinese market. This also supports new entrants in seizing opportunities in China. These

chances might be recurring and can be similar to the ones of companies which have

entered earlier. In this way newcomers can benefit from the experience of successful MNEs

regarding entry and expansion. Finally, flexibility, adaptability and resourcefulness are key

to meet challenges adequately and expand successfully in China (Cui, 1998).

2.4 Conceptual Framework

A conceptual and analytical framework addresses the main elements which are examined

and studied in a paper (Miles & Huberman, 1994). As pointed out before, a wide range of

classical theories, including internal as well as external factors, are related to entry mode

decision of multinational companies in China. This nexus of different influencing theories

and factors together provide an eclectic, comprehensive and also multi-layered perspective

on entry mode decisions of Scandinavian companies in the Chinese market. In this thesis, a

conceptual framework is developed on the basis of two overarching themes and five main

theories. This conceptual framework is reflected throughout the qualitative and

quantitative methodologies as well as the analysis of our findings in chapter 5. This means

that our multiple case study and quantitative study are also developed according to our

framework. The aim of this thesis is to investigate how different factors influence entry

mode decisions and expansion strategies of Scandinavian MNEs in the Chinese market.

Therefore, our conceptual framework includes both firm-specific and country-specific

factors, which are covered by the qualitative and the quantitative part. The two overarching

themes of this thesis are internal and external perspectives on entry mode decisions

and expansion strategies in China. The factors are also covered by five selected main entry

mode and expansion theories; the Eclectic Paradigm, the Resource-Based View,

Transaction Cost Theory, Institutional Theory and the Evolutionary Process

of Global Market Expansion.

We are aware of the fact that there are other factors which may also influence entry mode

and expansion strategies in China. However, our conceptual framework has been limited to

40

include factors which are both covered by the selected theories and can be operationalised

in our methodology. Figure 5 shows the conceptual framework which we have developed

and used throughout this thesis. Each investigated factor has been placed in connection to

its respective theory, methodological approach and internal/external perspective. As

illustrated in figure 5, some factors are covered by both the quantitative and qualitative

methodological approaches, which is shown by the use of two different colours.

41

Figure 5 - Conceptual Framework: Entry Mode and Expansion Factors of MNEs

42

3. Methodology

The following chapter contains a description of the research methodology used in this

thesis. The motivation for our chosen research approach is provided and the collection of

empirical data is described. The structure of the scientific perspective in this chapter

follows the “Research Onion”, developed by Saunders et al. (2012). Moreover, this chapter

is divided into a qualitative and a quantitative part in order to distinguish between our two

methodological approaches.

3.1 Purpose and Research Design

The purpose of our study is to provide Scandinavian MNEs and other stakeholders with a

deeper understanding of how different factors influence the entry mode and expansion

strategy in the Chinese market. By creating awareness of the influence of internal and

external factors, our study aims to fill a research gap which could help Scandinavian MNEs

in their expansion in the Chinese market. When considering the purpose of this thesis, the

most appropriate data collection method to apply is a combination of a qualitative and a

quantitative approach. The idea is that the quantitative part is focused on factors which

influence entry mode decisions of Scandinavian MNEs in China. This is done by

developing and testing a logistic regression model. It contains variables selected based on

the four classical entry mode theories as well as an expansion theory. The qualitative part

is mainly focused on the expansion strategies of MNEs, which have been present in China

for at least a decade. Data is collected through a multiple case study, where interviews are

conducted with company representatives from IKEA, H&M and Grundfos. By using a

combination of data collection methods, results are received from different perspectives. In

this way, they complement each other when drawing final conclusions of this study.

3.2 Operationalisation

In order to answer our research question in the most appropriate way, the two data

collection methods have different focuses - on factors which influence entry mode

decisions and on factors which influence expansion strategies. In the following sections,

our research question is translated into measurable factors.

43

3.2.1 Operationalisation of the Quantitative Part

The variables used in the quantitative model are shown in table 2. The dependent variable

is binary, where the effect of various independent variables changes the likelihood of

choosing either a JV or a WOS as the entry mode into China. In order to capture the

influence of internal factors on entry mode decisions, the following firm-specific variables

are included in the model: firm size, asset specificity and international experience. The

influence of external factors is examined by including the following country-specific

variables: political distance, cultural distance, economic distance and institutional

distance. The included variables do not only mirror the selected overarching themes of our

conceptual framework, but also the selected entry mode theories. First of all, Institutional

Theory is mainly captured by measuring the effect of institutional distance, cultural

distance and political distance. However, economic distance can also be seen as being

covered by this theory as government policies influence these variables. Secondly, the

Resource-Based View is mainly measured by the variable asset specificity as well as

international experience and firm size. Transaction Cost Theory is captured by the same

variables as Institutional Theory as well as by The Resource-Based View. Lastly, the

Eclectic Paradigm is measured by international experience, firm size, asset specificity,

economic distance and institutional distance as well as the control variables included in

our models.

3.2.2 Operationalisation of the Qualitative Part

The six interview questions used in the multiple case study can be found in appendix J.

The overall purpose of the questions is to investigate to what extent the interviewees’

answers differ depending on factors such as timing of entry and expansion in the Chinese

market. Also, industry influences as well as opportunities and challenges related to these

factors are investigated. By asking the same questions to all interviewees, different

viewpoints and experiences can be achieved. Introductory questions about the

interviewees’ professional background in the company are included to further understand

what kind of perspective the interviewee is likely to have of the MNE.

Firstly, internal factors on entry mode decisions and expansion strategies, are mainly

covered in questions two, four and six. The purpose is to capture the influence of factors

such as firm-specific know-how, firm size, international experience and organisational

44

structure, which are unique to the MNE. The organisational structure is further examined

in terms of decision making in various strategic moves. Question two applies to both

internal and external factors as its purpose is to capture overall opportunities since

entering and expanding in the Chinese market.

Secondly, external factors on entry mode decisions and expansion strategies, are covered

in questions three and five. The purpose of question three is to capture the influence of

external factors such as cultural distance, the Chinese labour market, legislation,

regulations and the institutional environment of foreign MNEs in the market, defence of

IPR as well as characteristics of the competitive environment. The external perspective is

also captured in question five in regards to the degree of local adaptation of the concept or

product offering needed in the Chinese market.

As explained earlier, the theories included in our conceptual framework are also reflected

in the interview questions. Question three is related to Institutional Theory and the Theory

of Cultural Distance. Question four is related to the Resource-Based View and Transaction

Cost Theory. Aspects of the Eclectic Paradigm as well as localisation and globalisation

strategies are covered by for instance questions three, four and five. The Evolutionary

Process of Global Market Expansion covers most of the included interview questions.

3.3 Scientific Perspective

The following section explains the scientific perspective from which this research is

conducted. The “Research Onion” (Saunders et al., 2012), shown in figure 6, is applied in

order to describe choices of for example philosophies, approaches and procedures used in

this research. The centre of the onion shows the data collection method, however further

layers of the onion also need to be explained in order to understand and motivate this

choice (Saunders et al., 2012).

45

Figure 6 - The Research Onion (Saunders et al., 2015, p.124)

3.3.1 Research Philosophy

A research philosophy is characterised by the nature and development of knowledge when

conducting a research. Saunders et al. (2012) discusses ontology and epistemology as two

possibilities of regarding research philosophy. First of all, ontology relates to the nature of

reality, which means that researchers make assumptions about how the world works

(Saunders et al., 2012). If social entities are viewed as objective ones that exist externally

and independently of social actors, the ontological approach is objectivism. If they are

instead seen as being continually generated by social actors, and in a constant state of

change, the approach is called constructivism. The main ontological approach of this

research is constructionism. This is motivated by the fact that knowledge is seen as

indeterminate, where our description of the social reality is presented in a specific version

and not seen as being definite (Bryman & Bell, 2005). Each company included in our case

study interviews has a unique perception and relationship to the business situation in the

Chinese market. This subjective reality of each company can help us understand their

motives and actions. However, our quantitative part has an approach which is related to

46

objectivism. Variables such as cultural distance or firm-specific know-how, can be seen as

something that a company from a certain country possesses and it is not constantly re-

created. Therefore, our research can be viewed through both lenses of constructionism and

objectivism (Saunders et al., 2012).

Secondly, epistemology is a theory of knowledge which relates to what is seen as acceptable

knowledge considering the orientation of research. The viewpoint, which states that

natural science methods should be used when studying the social reality, is known as

positivism. This philosophical approach aims to generate hypotheses which can be tested

and used to explain a phenomenon, where scientific statements should be exclusively

objective and value-free. Another viewpoint, known as interpretivism, focuses on the

importance of understanding the subjective meaning of social behaviour and interpreting

human actions (Bryman & Bell, 2005). In this research, a combination of positivism and

interpretivism is applied. In regards to the multiple case study, human understanding is

important. Therefore, the subjectivity of interpretivism is applied as the interviewees’

reflections and thoughts are evaluated. In regards to the quantitative part, the

philosophical viewpoint is instead positivism. The reason is that predictions are developed

and tested in order to reach an understanding of factors which influence entry mode

decisions. However, an interpretation of human behaviour is not taken into account in this

part of the analysis. In addition, when using positivism as a research philosophy, the most

common data collection technique is highly structured quantitative measurements

(Saunders et al., 2012).

3.3.2. Research Approach

The research approach of a study depends on the logic, generalisability, use of data and

conclusions in relation to theory. There are three main approaches, namely deduction,

induction and abduction. This thesis has a deductive approach. The reason is that our

research process starts with theory and then develops a framework based on existing

theory. This is followed by an evaluation of theories through hypothesis testing and

qualitative interviews. In this way, theory is verified or falsified. As for the quantitative

part, the aim is to understand causal relationships between entry mode decisions and

selected independent variables. These relationships are first explored in academic

literature and then tested through a logistic regression model. A deductive approach is

47

commonly identified with quantitative research, however it may also be used in qualitative

studies (Saunders et al., 2012). Since this thesis investigates the case of Scandinavian

MNEs, it also aims at contributing to existing theory. This is based on the fact that other

studies have not explored both entry mode and expansion strategies for firms with the

same geographical background. In this way, our research also includes elements of

abduction, where there typically is a lot of information in one situation but much less

information in the investigated situation. In this sense, existing theory may be modified or

new theory might be generated when it comes to applying it to firms with this particular

geographical background. Although this thesis has a dominant approach, combining

different research approaches is usually also considered advantageous (Saunders et al.,

2012).

3.3.3 Research Strategies and Choices

A multi-strategy of research that combines qualitative and quantitative methods, also

known as a mixed methods design, is used in this thesis. A comprehensive research allows

for the combination of the two methods and provides researchers with the advantage of

evaluating both dynamic features of qualitative research as well as static elements of

quantitative research (Bryman & Bell, 2005). In this thesis, equal weight is given to the

findings of the two methods, and the overall nature of our study is a combination of an

explanatory and exploratory kind. First of all, the study of a causal relationship between

variables in our quantitative part is explanatory in nature. Secondly, the qualitative part is

done through exploratory research (Saunders et al., 2012). There are several advantages of

using mixed methods and the following reasons motivate our choice of this research

design. First of all, the initial conduction of a quantitative study helps us formulate

interview questions for the subsequent qualitative study. Secondly, the level of

generalisability and credibility can increase through the use of mixed methods, where the

qualitative and quantitative parts may complement each other and link to one another in

the creation of knowledge. Lastly, the application of more than one method, is useful to

ascertain the validity and relevance of findings from each method. In turn, this leads to a

larger degree of confidence in conclusions (Saunders et al., 2012).

The particular research design of our thesis differs between the quantitative and qualitative

methods. First of all, an experiment strategy is conducted for the quantitative part. The

48

aim is to examine the likelihood of that change in an independent variable would cause

change in a dependent variable. This strategy uses hypotheses to express our predictions of

the relationship between variables. Secondly, a multiple case study strategy is used for the

qualitative part in order to gain an understanding of expansion strategies and challenges

experienced by MNEs in China. These aspects cannot be captured in the same way in an

experiment strategy since these factors are not quantifiable to the same extent as entry

mode decisions. The purpose of using a multiple case study is to explore existing theory

and find out whether results may be replicated across different cases (Saunders et al.,

2012). Using multiple cases instead of a single case is preferred since it generates more

powerful outcomes and makes an analytical generalisation possible (Yin, 2013).

3.3.4 Time Horizons, Techniques and Procedures

The time horizon for this research is rather long as it involves studying particular

phenomena over a long period of time. In regards to entry mode decisions, data is collected

from the year in which the Scandinavian MNEs entered the Chinese market (between 2007

and 2017). Therefore, the quantitative study provides a representation of how different

factors influenced this choice over a given period of time. In terms of the qualitative study,

it captures strategies of MNEs since their initial entry to China, which was at least a decade

ago. Based on the characteristics of our two studies, the time horizon is longitudinal in

nature (Saunders et al., 2012).

The data collection technique for this research is secondary data for the quantitative model

and a combination of primary and secondary data for the qualitative part. The global

database Orbis, which contains data provided by Bureau Van Djik Electronic Publishing,

was mainly used to collect data for our firm-specific variables. The database consists of

data on the domestic and international ownership structure as well as balance sheet and

income statement information of more than 130 million firms worldwide. Despite the large

amount of information available in Orbis, the database has received several points of

criticism. For instance, financial or real variables are sometimes missing, particularly when

trying to access older data. This is also the case with European countries, although these

often require firms to file most of the balance sheet information. Other issues are for

example related to the quality of data in Orbis, which makes checking and cleaning

procedures necessary (Kalemli-Ozcan et al., 2015). In regards to the collection of country-

49

specific data, the online databases of the World Bank and the United Nations, the Index of

Economic Freedom as well as Hofstede’s cultural indices, were used. The primary data for

the qualitative part was collected through interviews, while the secondary data was

collected through the use of online newspapers and company websites. By using semi-

structured interviews, the interviewees had the opportunity to answer the questions in the

way they interpreted them and the interview process was also flexible in terms of the order

of questions asked. This structure creates a sense of freedom for the interviewees (Bryman

& Bell, 2005) which is suitable for our qualitative study as it aims to capture differences in

answers depending on the nature of the company’s and interviewees’ background and

industry. The questions included in the interviews were open, which allowed the

interviewees to respond in an extensive and descriptive way (Saunders et al., 2012). In

some interviews, additional or follow-up questions were necessary to further investigate or

discuss a particular topic. Notes were taken during each interview and all interviews were

also audio-recorded after having asked each interviewee for permission. This was done to

prevent any misinterpretations when analysing our findings.

3.4 Data Collection

The aim of our described research design is to provide us with an extensive understanding

of entry mode decisions and expansion strategies, and thereby answer our research

question by using these combined findings. The following section outlines the data

collection procedures which were used in our two studies.

3.4.1 Sample - Quantitative Model

The sample consisted of Scandinavian MNEs which have entered China through a WOS or

a JV between 2007 and 2017. Since we are interested in the equity ownership shares of JV

and WOS, we looked for companies which held ownership in either of these forms. The

definition of Scandinavia is the same one as used by Orbis, namely Sweden, Denmark and

Norway (Orbis, 2017). The sample was restricted to include MNEs which have no less than

50 employees. This restriction was imposed because a search without the criterion showed

that smaller companies were missing data for several variables. In addition, the sample

exclusively included MNEs from the retail/wholesale and manufacturing industry. The

Orbis industry classification “NACE Rev.2 main sections” was used to filter companies

according to these two industries. The motive behind imposing this restriction was for the

50

sample to be in line with the selected case companies. These are active in the

retail/wholesale sector (IKEA, H&M) as well as in the manufacturing industry (Grundfos).

In total, our sample selection included 117 companies. In order to check for ownership

restrictions that would limit entry mode choices in the selected industries of our sample,

research was done in connection to the Catalogue for the Guidance of Foreign Investment

Industries. This revealed that advanced manufacturing was encouraged by the Chinese

government while some sub-sectors in traditional manufacturing were not supported. No

restrictions related to the retail/wholesale sector were found (Faegre & Benson, 2008).

Potential limitations of our quantitative sample are addressed in chapters 3.5 and 7.

3.4.2 Sample - Interviews

The overall aim of the interviews was to receive viewpoints and experiences from managers

who have worked with expansion strategies in the Chinese market. Four interviews were

conducted with managers from various departments and backgrounds at IKEA, H&M and

Grundfos. These companies were chosen based on the fact that they are MNEs in

Scandinavia. Their presence in various global markets and their ability to coordinate

activities in different ways, define them as multinational enterprises (OECD, 2008). In

addition, they all have at least a decade of experience from operating in the Chinese

market. The interviewees were chosen based on their extensive experience in the Chinese

market as well as in the companies. At the time of the interviews, our interviewees had

been employed at their respective companies between four and fifteen years. Their role in

the firm was important to us as well. It was either closely connected to expansion or to

legal matters, which allowed us to gain insights from different angles. In addition, one

written interview was conducted with the Global Law office in China (see appendix K). The

purpose of this interview was to understand the legal and institutional in the Chinese

market. The interview questions for the Global Law Office were different from the case

company questions, since they needed to be tailored to their specific purpose. The

questions were emailed to all interviewees one week prior to each interview. This allowed

for the interviewees to prepare themselves and therefore make the interviews more

efficient. All company interviews were performed via Skype since all interviewees were

situated abroad. After having conducted interviews, these were analysed in accordance

with our conceptual framework. Information about the five interviews are shown in table 1.

51

Name Corporate Function Date of interview

Type of interview

Charlotta Bengtsson

Legal Counsel, IKEA 2017-02-22 Skype

Simon Maynard

VP Retail Property & Expansion, IKEA

2017-02-24 Skype

Peter Kiaer

Sales Director Residential Building Services, Grundfos China

2017-03-07 Skype

Maria Eistrand

Real Estate Manager South East Asia (at the time of the interview), H&M

2017-02-28 Skype

Muriel He Associate, Global Law Office, Shanghai, China

2017-03-01 E-mail

Table 1 - Interview Information

3.4.3 Model and Measurement – Quantitative Part

The following sub-chapter describes the model and measures applied in the quantitative

part of this thesis. The most commonly used statistical method in entry mode studies is a

logistic regression. When examining entry mode choice, a logit model is reasonable since

the variable is easily codified as a dichotomous one (Canabal & White, 2008). Another

model that has been commonly used is a probit model, which in practice results in the

same quantitative findings as a logit model. The choice between these models is mostly

arbitrary, however, the logit model is advantageous in the sense that results are easier to

interpret in regards to how odds change with variations in an independent variable. In a

probit model, changes in odds require some further calculations (Bowen & Wiersema,

2004). Therefore, a logit model was applied in this thesis.

As shown in table 2, data was collected from various sources. Data was later transferred

into numerical codes in Excel. The statistical analysis software package, Stata, was used to

run our regression models. To ensure a high quality of our models, several statistical tests

were performed. Chapter 4 presents descriptive statistical data of the variables followed by

findings generated by the model.

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3.4.4 Variables

The variables included in our study follow the themes of the conceptual framework, and

they are divided into internal and external ones. In the following section, these variables

are introduced and motivated. A hypothesis is formulated for each independent variable

and a summary of our expectations can be found in table 9 in chapter 4.

Dependent Variable

Entry Mode. Our dependent variable is a categorical and dichotomous variable which

classifies the choice between the entry modes JV and WOS. The variable takes the value 0

if the entry mode is a JV, and 1 if the entry mode is a WOS (as indicated by Zephyr, Orbis

or other sources). A dependent variable that categorises the choice between shared and full

ownership is the most commonly used dependent variable in entry mode studies (Canabal

& White, 2008). Other studies have commonly used equity levels (Canabal & White, 2008)

by distinguishing between for example equity and non-equity modes of entry (Brouthers &

Nakos, 2004). In terms of data collection, an initial issue was discovered since we were

only able to obtain the most recent ownership share in Orbis. This means that a company

could have entered with a lower ownership share before 2007 and could have increased

this share over time. This could create a bias in terms of an over-representation of WOS in

the sample. In order to overcome this issue, all companies with subsidiaries in China

between 2007 and 2017, were cross-checked in the Zephyr database (Zephyr, 2017), which

contains data of mergers and acquisition deals provided by Bureau Van Djik. Zephyr

provided us with the year of establishment of the JV or WOS in China. However, if this

information was not available in Zephyr, the information was extracted manually from

different sources such as company websites, press releases or online newspaper articles.

Observations with a different ownership share than the latest one provided by Orbis, were

then corrected in our sample data.

Independent Variables - Internal variables

International experience. The most commonly used independent variable in entry

mode research is the international experience of MNEs (Canabal & White, 2008). The

measure of international experience in our thesis, was based on a company’s number of

foreign subsidiaries in relation to its total number of subsidiaries. This measurement

53

allowed us to explore the degree of internationalisation in regards to establishing

connections and networks in foreign markets. Measurements used in other studies have

for instance been the ratio of export sales to total sales, degree of investment activity

measured by the number of FDIs (Delios & Beamish, 1999), the share of total sales

originating from foreign operations (Agarwal & Ramaswami, 1992) or the number of

foreign entries (Anderson & Gatignon, 1988). Some previous studies have found a positive

relationship between international experience and the choice of higher ownership

positions in entry mode strategies (Delios & Beamish, 1999; Anderson & Gatignon, 1988).

As firms broaden their international experience, they tend to choose WOS as entry mode

which seems to be related to the process of “learning by doing” (Anderson & Gatignon,

1988, p. 331). However, other studies have not found significant results when it comes to

the relationship between international experience and entry mode choice (Blomstermo &

Sharma, 2006; Kogut & Singh, 1988; Brouthers, 2002). For example, Blomstermo and

Sharma (2006) measured the variable in terms of previous experience in international

markets. They found no support that greater foreign market experience would lead

companies to choose a higher control mode of entry. Wang and Schaan (2008) suggest that

particularly high costs are associated with knowledge transfers to foreign subsidiaries

when there is a difference in culture between the home and the host country. In this case,

forming a JV with a local partner seems preferable since previous knowledge and

experience can be complemented and shared between partners in the JV. Previous

research shows contradictory findings, however we predict that a larger degree of

international experience may lead to a lower level of ownership structure in China,

meaning that a JV would be preferred over a WOS (Hypothesis 1).

Firm size. As studied by many scholars, we also examined the influence of the resource-

based variable firm size, on entry mode choice (Canabal & White, 2008). According to

Brouthers and Nakos (2004), research has found that larger firms generally tend to have a

greater amount of resources, and prefer to enter through higher control entry modes.

Moreover, the size of a firm tends to indicate a company’s ability of meeting resource

requirements (Buckley & Casson, 1998). Several findings related to large firms’ entry mode

decisions, have shown that firm size and equity-based entry modes are positively

associated (Agarwal & Ramaswami, 1992; Wulff, 2015a). However, other scholars have

found no significant relationship between firm size and entry mode choice (Brouthers &

54

Nakos, 2002; Wang & Schaan, 2008). Wulff (2015b) reviewed empirical entry mode

research and found that, although firm size is the most used control variable in entry mode

studies, the existence of the same proportion of positive and insignificant results could not

be rejected (Wulff, 2015b). Previous studies have measured firm size in terms of number of

employees (Brouthers & Nakos, 2004; Wulff, 2015b), or by total volume of sales (Agarwal

& Ramaswami, 1992). We expect a high level of correlation between the above mentioned

variables and decided to use the number of employees at the year of entry in China, as a

measure of firm size. Previous findings regarding the influence of firm size on entry mode

choice provides us with the expectation of a positive relationship between firm size and the

level of ownership in China. In other words, we expect WOS to be selected over JV as the

firm size increases (Hypothesis 2).

Asset specificity. As outlined in the previous chapter, the transaction cost variable asset

specificity, has commonly been measured in terms of R&D intensity (Brouthers & Hennart,

2007). This thesis applied the same measure in terms of R&D expenses in relation to total

sales. Asset specificity is one of the most tested determinants when taking on a Transaction

Cost Theory perspective in entry mode research (Wulff, 2016). A firm with a high degree of

asset specificity is more likely to choose an entry mode with a higher level of control like a

WOS. This is due to the fact that assets may be protected from potentially opportunistic

acts of a partner (Brouthers & Hennart, 2007). Even though a great part of studies did not

find a significant relationship of asset specificity in explaining entry mode choice

(Brouthers & Hennart, 2007; Wulff, 2016; Brouthers, 2002), some studies found support

for asset specificity as a significant variable in choosing between a WOS and a JV

(Brouthers et al., 2003; Gatignon & Anderson, 1988). Several studies found a significant

negative connection, meaning that a higher degree of asset specificity increase the

probability for MNEs to enter with a partner (Palenzuela & Bobillo, 1999; Delios &

Beamish, 1999). Both relationships show that findings regarding the relation between asset

specificity and entry modes are not unambiguous. When following Transaction Cost

theory, outlined in the literature review, we formulate the hypothesis that firms with a

greater level of asset specificity prefer to enter through a WOS rather than through a JV

(Hypothesis 3). This is related to the preference of keeping control over foreign operations

in order to protect assets.

55

Independent variables - External variables

Cultural distance. Out of the country-specific variables used in our model, cultural

distance is the most commonly used variable in research on entry mode choice (Canabal &

White, 2008). As outlined in the literature review, many scholars have examined the effect

of cultural distance on the choice of entry modes (e.g. Agarwal, 1994; Kogut & Singh, 1988,

Luo, 2001). In our study, cultural distance is measured by means of the Kogut and Singh

(1988) index, which is calculated on the basis of the country scores developed by Hofstede

(1980). We decided to only include Hofstede’s four original dimensions in our measure.

Since, changes in indices cannot be traced back in time, the same scores are used

independently of the year of entry. This is a valid approach according to Hofstede (2010).

The reason behind the stability of scores over time, is that changes in culture often occur

on a global or continent-wide scale. In order to obtain the cultural distance, the following

formula, developed by Kogut and Singh (1988), is used:

𝐶𝐷𝑗 = ∑ =

4

𝑖=1

{(𝐼𝑖𝑗 − 𝐼𝑖𝑐)2/𝑉𝑖}/4

CDj equals the cultural distance between the host country China c, and the home countries

j, which are of Scandinavian descent. The different cultural dimensions are represented by

i. Iic is China’s value on a particular dimension and Iij is the same value for a Scandinavian

country. Vi is the variance of the cultural dimension i. By dividing the formula by four, the

arithmetical average is obtained. Overall, a higher value signifies a higher cultural distance

between the home and the host country China (Kogut & Singh, 1988).

Previous studies which researched connections between cultural distance and entry modes

came to different results. Some scholars came to the result that a high distance in culture

increases the costs of collaboration, which can exceed the costs embedded in direct control

(Brouthers & Brouthers, 2001). Findings show that firms choose higher equity control

modes as cultural distance increases (Erramilli et al., 1997). Other scholars claim that a

high cultural distance leads multinational firms to choose collaborative entry modes like

JVs (Shenkar, 2001; Hennart & Larimo, 1998). For instance, studies by Kogut and Singh

(1988) as well as by Hennart and Larimo (1998), found that high cultural distance

increases the probability that MNEs enter as a JV. Anderson and Gatignon (1988) suggest

56

that a common argument is that a lower degree of control will be preferred when the socio-

cultural distance between home and host countries is larger. Nevertheless, their results

showed that socio-cultural distance generally does not seem to have a large influence on

entry mode choice (Anderson & Gatignon, 1988). Other studies also did not find a

significant relationship between cultural distance and entry mode choice (Tihanyi et al.,

2005). We aim at testing the hypotheses that a greater cultural distance between the home

and host country increases the likelihood that MNEs will choose a JV over a WOS when

entering China (Hypothesis 4).

Political distance. In order to account for some of the external uncertainty

multinational corporations face when entering a new market, a variable measuring

political distance in terms of risk, was included. According to Transaction Cost Theory,

uncertainty is one of the three dimensions which characterizes transactions (Williamson,

1985). Hence, we aim to partly cover this dimension by measuring the effect of political

distance. While there are different measures of country and political risk, as for instance

related to corruption, political or government stability (World Bank, 2017), we decided to

focus on the political risk index provided by the World Bank (2017) which is based on data

from the Political Risk Services (PRS). The index consists of six overarching dimensions,

namely voice and accountability, political stability and absence of violence, government

effectiveness, regulatory quality, rule of law and control of corruption (World Bank, 2017).

The political distance variable is obtained by using the structure of the cultural distance

formula by Kogut and Singh (1988), as shown below. However, the political risk scores of

the six different dimensions are incorporated instead of cultural scores, in order to

generate one political risk score for each of the home countries in the years from 2007 to

2017. This is done to measure the distance in political risk between both countries.

𝑃𝐷𝑗 = ∑ =

6

𝑖=1

{(𝐼𝑖𝑗 − 𝐼𝑖𝑐)2/𝑉𝑖}/6

In this formula, 𝑃𝐷𝑗is the political distance between China and home country j. 𝐼𝑖𝑗is in this

regard the ith political risk dimension of the jth country. Respectively, 𝐼𝑖𝑐is the

corresponding ith dimension for China. 𝑉𝑖 is the variance of the specific dimension i. By

dividing the whole formula by six, we account for the six different dimensions. A lower risk

score signifies a higher level of political risk and greater political distance between the

57

home and the host country. By measuring environmental uncertainty through political risk

(Brouthers et al., 2002), the direct effect of one type of uncertainty can be tested in our

quantitative study. According to Transaction Cost Theory, it is expected that firms avoid

ownership when entering a volatile, high-risk market. This is the case because with a

higher commitment of resources it becomes more difficult to shift operations if external

changes occur. By choosing a low-control entry mode, flexibility can be kept (Anderson &

Gatignon, 1986; Williamson, 1979). In contrast, other studies argue that a volatile

environment leads firms to choose higher control entry modes in order to solve conflicts

and react appropriately to uncertainties (Killing, 1982; Bivens and Lovell, 1966). However,

this makes it difficult for firms to react fast to external changes and commits them to a

market which may evolve as not beneficial (Root, 1983). In line with transaction cost

theorists, we expect that a larger political distance between the home and the host country,

increases the probability that firms enter through a JV, instead of a WOS (Hypothesis 5).

Economic distance. In order to measure the economic distance between the home and

the host country, the real gross domestic product (GDP) per capita (in US dollars), at the

year of entry can be used. This measure has been applied the most to measure economic

distance and the development between different economies (Hutzschenreuter et al., 2014).

According to Tsang & Yip (2007), economic distance between China and more developed

countries can be calculated by subtracting the real GDP per capita of China (yc) from the

GDP per capita of the more developed countries (y,in our case Denmark, Sweden and

Norway). This results in the formula: Economic distance = 𝑙𝑛 (𝑦) − 𝑙𝑛 (𝑦𝑐). Data for the

calculation of this variable was retrieved from The United Nations Conference on Trade

and Development (UNCTAD, 2017). The natural logarithm of the variable was used to get a

more precise measurement because of the small differences in GDP per capita. This is done

as a standard procedure in econometrics (Tsang & Yip, 2007). The effect between

economic distance and the ownership level of a company’s entry mode has been

investigated by different scholars in various ways. Tsang & Yip (2007) investigated the way

entry mode choice influences the relationship between FDI hazard rates and economic

distance. Johnson & Tellis (2008) examined the connection between entry mode success

and economic distance, and found that a lower economic distance increases the entry

mode success of the company. In accordance with the effects of other external variables,

such as political and cultural distance, we formulate the hypothesis that the larger the

58

economic distance between two countries, the higher the likelihood that MNEs enter the

market through a JV over a WOS (Hypothesis 6).

Institutional distance. Differences in the institutional environment between China and

the home countries, were measured using an institutional distance index at the year of

entry. This construct was introduced by Kostova (1999), as the difference in institutional

characteristics of two countries. We implemented this measure to capture the effect of

institutional distance on entry mode choice. The variable was obtained from the Index of

Economic Freedom which consists of 12 different dimensions, namely business freedom,

property rights, investment freedom, government integrity, judicial effectiveness, tax

burden, government spending, fiscal health, labour freedom, monetary freedom, trade

freedom and financial freedom (Index of Economic Freedom, 2017). For the calculation of

institutional distance, the overall score of all these dimensions was used for the respective

years (2007 - 2017). In order to calculate the institutional distance, the absolute

differences between the overall score of China and the scores of Sweden, Denmark and

Norway were obtained. This was done for the year of entry of all companies. According to

Xu and Shenkar (2002) this measure complements the cultural distance index and

together, they provide a more cohesive assessment of the host country environment.

Moreover, this factor can be derived from Institutional Theory. Several studies (Xu &

Shenkar, 2002; Kostova, 1999) came to the result that a higher institutional distance

makes companies choose to enter with a partner in order to minimise risk associated with

institutions. In a JV, the partner can transfer knowledge and local practices which supports

foreign MNEs in dealing with an institutionally distant environment. This leads to the

hypothesis, that with an increasing institutional distance between the host country China

and the Scandinavian home countries, the probability increases that companies will choose

to enter through a JV instead of a WOS (Hypothesis 7).

Control variables. Several control variables are introduced in order to control for other

potentially relevant variables which may have an effect on the relationship that we want to

investigate. This is important in order to ensure the generalisability of results (Becker,

2005). If relevant control variables are excluded, it is possible that incorrect results are

obtained (Bernerth & Aguinis, 2016). The three control variables included in our study are

considered to be related to the theories presented in chapter 2. To control for the influence

59

of industry differences, a dummy variable, which distinguishes between firms belonging to

the retail/wholesale industry and the manufacturing industry, is included The industry

variable takes the value 0 if the MNE is part of the retail/wholesale sector and the value 1 if

it is part of the manufacturing sector. In this way, we follow existing literature in which

industry differences are controlled for by making use of a dummy variable (Kogut & Singh,

1988; Brouthers, 2002; Brouthers et al., 2003). The industry variable is also one of the

most used control variables in entry mode research (Wulff, 2015b). In addition, the

categorical variable country was included to control for home country differences between

MNEs from Sweden (1), Denmark (2) and Norway (3). In former studies, scholars also

controlled for differences between home countries (Wulff, 2016; Brouthers et al., 2008).

Our third control variable is included to control for differences in the year of entry or re-

entry to China. This control variable has been also used by other scholars (e.g. Wulff,

2015b). As a robustness check, dummy variables for each country as well as year of entry

were included in one of our models.

Table 2 provides an overview of the internal, external and control variables included in our

model.

60

Table 2 - Overview of Variables and their Characteristics

61

3.5 Source Critical Consideration - Quantitative Part

First of all, validity relates to the extent which a measure really captures an intended

concept. Secondly, reliability concerns the conformity and consistency of measures. We

aim to reach a high level of validity and reliability by applying similar variables and

databases as numerous previous scholars. In addition, we aim to achieve a high level of

validity by clearly outlining the procedures of this study so that it can be replicated by

other researchers, who for instance use different database sources (Bryman & Bell, 2005).

An advantage of using secondary data is that it is usually of high quality and the

information available often contains a high level of representativeness. However, key

variables are sometimes not available in the main databases used (Bryman & Bell, 2005).

Therefore, they need to be manually cross-checked and obtained from other ones. This was

the case for some of our variables obtained from Orbis, which made the process very time-

consuming. In regards to the variable asset specificity, it was not applicable for firms in our

sample which operate in the retail industry, since these firms generally do not have large

R&D expenses. Consequently, the model had to be adapted to exclude this part of the

sample when including the asset specificity variable. This influences the consistency and

representativeness of our conclusions in this study. In terms of the choice of industries

included in our sample, we have aimed to include sectors without ownership restrictions

since this would limit MNEs in their entry mode choice. Yet, there may be some

restrictions on foreign ownership in certain sub-categories of products which could have

changed during sample period. In order to minimise this risk, we cross-checked industry

information of companies which entered China through a JV.

In regards to our model, the choice was a binary logit model between the entry modes JV

and WOS. Nevertheless, an MNE is likely to consider more than two choices when making

an entry mode decision (Bowen & Wiersema, 2004). Therefore, a multinomial logit model

may have been more appropriate in order to include more than two entry mode choices in

our study. However, due to the limited time frame and scope of this thesis as well as the

frequent use and appropriateness of a binary logit model for our purpose, we decided to

adopt the latter. Lastly, our sample was restricted to include firms with no more than 50

employees, which could lead to an overrepresentation towards choosing entry modes with

higher equity control. The reason is that research has found that larger firms are more

62

likely to have more resources, and tend to be able to engage in entry modes with higher

control compared to smaller firms (Brouthers & Nakos, 2004).

3.6 Source Critical Consideration - Qualitative Part

When evaluating the quality of a study, it is important to take reliability and validity

criteria into account. Nevertheless, the relevance of measuring these criteria for qualitative

studies has been discussed since they are believed to be more suitable for quantitative

studies. Therefore, the following sub-criteria have been suggested to evaluate qualitative

studies; credibility, transferability, dependability and confirmability (Bryman & Bell,

2005). In regards to this thesis, we are aware that only including MNEs from Sweden and

Denmark in our interviews could be misleading in regards to the representativeness of

Norwegian MNEs, which are also part of Scandinavian firms in the quantitative sample.

Since interviews were only possible with managers from two out of the three Scandinavian

countries, we are aware that the generalisability of this study of Scandinavian MNEs might

be limited by our choice of case companies. However, the quantitative part covers firms

from all three countries which makes the entry mode choice part of this thesis applicable to

firms from all Scandinavian countries. Also, firms of Scandinavian countries exert

similarities in terms of business culture and have been studied together in former papers

(Carlsson et al., 2005; Selnes et al, 1996). The common political, cultural and societal

environment of Sweden, Norway and Denmark has brought about the term “Scandinavian

management”. The management style is associated with project management, an

encouragement of flat hierarchies and a high level of staff involvement and dialogue (May

et al., 2007). Based on these findings, we expect a high level of similarities in terms of

challenges encountered in China as well as experiences in influencing factors on entry

mode expansion strategies. In addition, differences between the three countries are not the

focus of our analysis. Overall, the exclusion of Norwegian companies is not seen as a major

limitation in this thesis.

Credibility. Credibility relates to the way in which the researcher describes the social

reality and to what extent its credibility is acceptable to other people (Bryman & Bell,

2005). In this thesis, the technique respondent validation was used to ensure that we had

understood the social reality in the right way. This process involved sending our empirical

63

results to the interviewees in order to confirm that we had interpreted their views and

experiences correctly.

Transferability. Transferability concerns the extent to which the results of a particular

study can be applied and transferred to a different context, time frame or environment.

Qualitative studies tend to investigate a unique context and social reality (Bryman & Bell,

2005). The interviews of this study involved managers from a small group of Scandinavian

MNEs and we are aware that the transferability of the qualitative part of this study is

limited.

Dependability. In order to assess the reliability of a study, the research process and all

of its phases have to be completely reported and available. Thereafter, the quality of a

study can be examined by peers in order to achieve a critical view on the process (Bryman

& Bell, 2005). In this thesis, our supervisor and student partners provided us with critical

viewpoints and feedback on selected research areas.

Confirmability. It is important that researchers realise that they are unable to reach

complete objectivity since qualitative studies of social context always include some

elements of subjectivity (Bryman & Bell, 2005). In this regard, our aim is to reach the

highest possible level of objectivity when interpreting our qualitative findings. Respondent

validation is also used to receive a different viewpoint on our interpretations.

3.7 Research Ethical Reflection

When developing a research design, it is important to consider research ethics (Saunders

et al., 2012). In order to ensure that this study is conducted in an ethical way, all

interviewees were informed about the purpose of our research and they were asked for

approval in regards to having the interviews recorded. As previously mentioned,

respondent validation was used to ensure that our interpretations of the interviewees’

answers were correct and representative of their respective firm. Lastly, ethical concerns

related to the anonymity of interviewees and confidentiality of data (Saunders et al., 2012)

have been taken into consideration before making this thesis available to anyone apart

from ourselves.

64

4. Empirical Data

This chapter presents our empirical findings from the quantitative part. In the first section,

results as well as descriptive statistics are presented in order to show the distribution and

correlation of variables in the model. Results from statistical tests, that were performed to

assess the performance of our model, are also presented. In the second section, empirical

data from our interview with the Global Law Office is presented. The purpose of this

information is to explore how the regulatory and institutional environment in China

influences Scandinavian MNEs’ entry mode and expansion strategies. Next, the three case

companies and their internationalisation strategy in China are presented. This data was

collected from secondary sources such as academic articles, newspapers and company

websites. The qualitative findings from the interviews are presented and analysed in

chapter 5.

4.1 Findings from the Quantitative Part

In this section, the findings of our logistic regression are presented. The purpose is to

determine which effect independent variables have on MNEs entry mode choice between a

JV and a WOS. This is done for our sample of Scandinavian companies which have entered

China. By including the different variables outlined in chapter 3.4.4, the equation of our

binary logistic regression is obtained as the following:

𝑒𝑛𝑡𝑟𝑦𝑚𝑜𝑑𝑒 = 𝛽0 + 𝛽1 𝑦𝑒𝑎𝑟_𝑒𝑛𝑡𝑟𝑦𝑖 + 𝛽2 𝑐𝑜𝑢𝑛𝑡𝑟𝑦𝑖 + 𝜑3 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦𝑖 + 𝛽4 𝑠𝑢𝑏𝑟𝑎𝑡𝑖𝑜𝑖

+ 𝛽5 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠_𝑒𝑛𝑡𝑟𝑦𝑖 + 𝛽6 𝑐𝑢𝑙𝑡𝑢𝑟𝑎𝑙𝑑𝑖𝑠𝑡𝑖 + 𝛽7 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐𝑑𝑖𝑠𝑡_𝑒𝑛𝑡𝑟𝑦𝑖

+ 𝛽8 𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙𝑑𝑖𝑠𝑡_𝑒𝑛𝑡𝑟𝑦𝑖 + 𝛽9 𝑝𝑜𝑙𝑖𝑡𝑖𝑐𝑎𝑙𝑑𝑖𝑠𝑡_𝑒𝑛𝑡𝑟𝑦𝑖

+ 𝛽10 𝑎𝑠𝑠𝑒𝑡_𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐𝑖𝑡𝑦_𝑒𝑛𝑡𝑟𝑦𝑖

This equation includes all variables however, it does not reflect all of our models. The

variable 𝑒𝑛𝑡𝑟𝑦𝑚𝑜𝑑𝑒 represents the binary dependent variable and therefore the entry

mode choice. 𝛽0 reflects our constant and 𝛽𝑖 represents the independent variables (at the

year of entry). This includes the control variables 𝑦𝑒𝑎𝑟_𝑒𝑛𝑡𝑟𝑦 and 𝑐𝑜𝑢𝑛𝑡𝑟𝑦 (included as

dummy variables in model 7), as well as the dummy variable 𝑖𝑛𝑑𝑢𝑠𝑡𝑟𝑦 which is represented

65

by 𝜑𝑖. The variables which we are interested in further exploring, in terms of their

significance and relationships, are the following:

𝑠𝑢𝑏𝑟𝑎𝑡𝑖𝑜, 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑒𝑠_𝑒𝑛𝑡𝑟𝑦, 𝑐𝑢𝑙𝑡𝑢𝑟𝑎𝑙𝑑𝑖𝑠𝑡, 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐𝑑𝑖𝑠𝑡_𝑒𝑛𝑡𝑟𝑦, 𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛𝑎𝑙𝑑𝑖𝑠𝑡_𝑒𝑛𝑡𝑟𝑦,

𝑝𝑜𝑙𝑖𝑡𝑖𝑐𝑎𝑙𝑑𝑖𝑠𝑡_𝑒𝑛𝑡𝑟𝑦 and 𝑎𝑠𝑠𝑒𝑡_𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑐𝑖𝑡𝑦_𝑒𝑛𝑡𝑟𝑦.

In order to control for year-specific and country-specific effects, a model including dummy

variables for each year and home country, known as model 7 (see appendix G), was also

tested. As discussed before, the use of a binary logistic model is in line with other studies.

These also aimed at estimating the impact of different dependent variables on the

probability of choosing between two different entry modes (Gatignon & Anderson, 1988;

Kogut & Singh, 1988; Agarwal & Ramaswami, 1992).

After the presentation of descriptive statistics, seven different models are outlined in order

to account for differences between models, check for robustness and identify how possible

changes affect our coefficients. Thereafter, two primary models are selected for further

analysis. These include models which contain all variables for the respective samples.

Overall, the relationships found in our models are of primary interest, while the statistical

significance itself becomes rather secondary. This means that we do not want to exclude

relationships of interest solely because of their statistical insignificance in a specific model.

4.1.1 Descriptive Statistics

The full sample consists of 117 unique companies from Sweden, Denmark and Norway

which entered or re-entered China through a JV or WOS between 2007 and 2017.

Companies which had made several entries to China throughout this time period and

therefore occurred more than once in our sample, were only included once. All companies

included in this sample had at least 50 employees at the time of entry and operate in the

retail/wholesale sector or manufacturing industry. The home country and entry mode

distribution of our data is shown in table 3. The majority of companies entered China

through a WOS (79%), showing that the entry mode commitment in our sample is very

strong when deciding between a WOS and a JV. When looking at the distribution among

companies from the same country, WOS is also shown to be the preferred entry mode

across the three home countries. Moreover, the distribution shows that most companies in

our sample are from Sweden and relatively few companies are from Norway.

66

Entry Mode Country JV WOS Total Sweden 17 45 62

Denmark 6 41 47 Norway 2 6 8 Total 25 92 117

Table 3 - Home Countries and Entry Mode Choices

Table 4 illustrates the industry distribution of companies covered by our sample. As shown

in the table, the majority of companies are from the manufacturing industry. This part of

the sample was used to estimate two models containing the variable asset specificity. The

reason is that companies belonging to the retail/wholesale industry are rather unlikely to

have any recorded R&D expenses. Manufacturing companies which did not have any

recorded R&D data for the year of entry to China, were removed from the overall sample in

two models. This resulted in 53 unique companies for the estimation measuring asset

specificity.

Industry Frequency Percent

Retail/Wholesale 17 14.53 Manufacturing 100 85.47 Total 117 100

Table 4 - Industry Distribution

As reported in table 5, the average number of total employees at the year of entry into

China is 6753. Since our sample had a restriction of including only firms with at least 50

employees but no upper restriction, the distribution is right-skewed due to very large

companies included in the sample, with some of them having a total number of more than

40 000 employees. This is illustrated by the percentile values in the table, where the mean

value exceeds the 75th percentile. As also shown in table 5, the average company in our

sample has a total of 37 subsidiaries of which 30 are foreign.

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Percentile 25th 50th 75th Mean

Total employees at the year of entry

171 541 3488 6753.068

Foreign Subsidiaries

5 14 41 29.84615

Total Subsidiaries 6 18 49 37.10256

Table 5 - Distribution of the Number of Employees

Table 6 shows the mean, standard deviation as well as the Pearson correlation table of all

dependent and independent variables included in the full model, where asset specificity

was excluded. The Pearson correlation table which includes asset specificity, can be found

in appendix I. Table 6 includes the correlation values as well as the p-values for each

coefficient (the latter are in brackets). The asterisk (*) signifies that a correlation

coefficient is significant at a significance level of 0.05. The rather high mean value of the

dependent variable entry mode (79%), once again indicates a strong entry mode

commitment towards choosing WOS in China for companies in our sample. In addition,

the relatively high mean of the variable subsidiary ratio (83 %), illustrates the high level of

internationalisation of firms in the sample. Before analysing the logistic regression results,

it is important to check for multicollinearity between the independent variables. This is

done by examining the Pearson correlation table. According to a guide suggested by Evans

(1996), the range for strong correlation is for values between 0.6 and 0.79, and the

correlation table shows that four cases of bivariate correlation are within this range. One of

the cases concerns the control variables, country, which is correlated with institutional

distance. Two cases concern the control variable year of entry, which is correlated with

economic distance and political distance respectively. The last case concerns the variables

economic distance and political distance. Even though the correlation values of these

variables are within the range of strong correlation, they are still below the 0.8 value,

which indicates very strong correlation (Evans, 1996). Hence, no variables will be

excluded from the model, however we will take the relatively strong correlation of some

variables into consideration when testing our models and analysing the findings.

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Table 6 - Pearson Correlation Table including mean and standard deviation values

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4.1.2 Empirical Results

Following the discussion on descriptive statistics, this section presents the results of our

logistic regression. Seven different models were tested using the Stata. The first model

(model 1) is the base model which only includes the control variables year of entry, country

and industry. Model 2 includes the control variables as well as the internal variables firm

size and international experience. In model 3 the external variables cultural distance,

economic distance, institutional distance and political distance are included as well as the

control variables. Moreover, model 4 includes all variables except for asset specificity.

Model 1 to 4 are tested based on the entire sample size. In model 5 and 6, the sample

contains mostly manufacturing companies (for some companies in the retail industry,

R&D data was available). In these models, the variable asset specificity is added. Model 5

includes all internal variables as well as control variables. In model 6, all other variables

are added to the model. To check for robustness, a seventh model, including all variables,

is tested. In this model, dummy variables for each year of entry and host country are

included in order to control for country-specific and time-specific effects. The outcomes of

the different models are discussed based on table 7 and 8 and appendix A-G.

In table 7 and 8, the beta coefficients, standard errors of our independent variables as well

as the p-values for model 4 and 6, are shown. These two models are our main focus in the

analysis part in chapter 5. The reasons for choosing these two models are explained later in

this chapter. The sign of the coefficients indicates the direction of the relationship and

therefore, point out which independent variables increase or decrease the probability that

a WOS or a JV is chosen as an entry mode. A positive sign shows that the likelihood of

choosing to enter through a WOS increases when the value of a coefficient increases. A

negative sign implies that it is more likely a JV will be chosen as an entry mode when the

corresponding independent variable increases. The asterisks (*) in the table indicates if a

coefficient is statistically significant at a significance level of 0.05 (when p<0.05). In the

following sections, the results of our internal and external variables are discussed. A

summary of results, excluding the control variables, can be found in table 9.

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Coef. Std.Err p>IzI year_entry -0.5069986 0.2510523 0.043* country 2.290976 2.21284 0.301 industry -0.700745 0.8999573 0.436 subratio -0.783837 1.688696 0.643

employees_entry -.0000879 0.0000253 0.001* culturaldist 11.92116 19.06707 0.532 economicdist_entry -3.308326 2.626893 0.208 institutionaldist_entry -0.2014018 0.3477398 0.562 politicaldist_entry 0.3412109 1.091521 0.755 constant 962.8784 453.1941 0.034

Table 7 - Logistic Regression Results Model 4

entrymode Coef. Std.Err p>IzI year_entry -0.5079641 0.4915774 0.301 country -0.2436453 4.670393 0.958 industry 0 (omitted) asset_specificity_entry -0.082792 0.0762529 0.278

subratio -2.829607 2.84107 0.319 employees_entry -0.0000934 0.0000381 0.014* culturaldist -8.893708 38.13917 0.816 economicdist_entry -5.315248 4.39529 0.227 institutionaldist_entry 0.228986 0.7460624 0.759 politicaldist_entry -0.8648109 2.122933 0.684 constant 1091.107 870.6749 0.210

Table 8 - Logistic Regression Results Model 6

Internal Variables - Results. When examining the statistical results for the internal

variable subratio, which is included in model 2 and 4 - 7, it can be seen that it always

shows a negative relationship. This is in line with the expected result in terms of the sign.

The negative relationship emphasises that a greater international experience increases the

likelihood to choose a JV over a WOS. However, the variable is not significant in the

different models. The next internal variable, employees_entry, which measures firm size,

is included in the same models as subratio. employees_entry is found to be significant in

all models. The relationship is negative meaning that a higher number of employees at the

year of entry, indicates that the likelihood increases that a JV is chosen, which is not what

we expected from this variable. The coefficient has a value of -0.0000879 in model 4. This

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means that a change of one unit in the number of employees at the year of entry leads to a -

0.0000879 unit change in the log of the odds of our dependent variable.

Our third internal variable, asset specificity at the year of entry, (asset_specificty_entry),

was only included in model 5 and 6 as it mainly concerns manufacturing companies. In

both models, the coefficient shows a negative sign which indicates that firms with a higher

asset specificity tend to choose a JV over a WOS. However, the variable is not significant in

either o these models.

External Variables - Results. The external variables were included in models 3, 4, 6

and 7. First of all, the variable culturaldist has a positive relationship in the first two

models as well as in model 7. It is not found to be significant. The positive relationship is

contradicting our hypothesis, stating that the variable would be negatively related to our

dependent variable. However, the sign of the coefficient changed in model 6 and became

negative which is in line with our predictions. Nevertheless, the variable was not found to

be significant. Secondly, economic distance at the year of entry (economicdist_entry)

shows a negative relationship in all models, which is in line with our expectations of this

variable. The negative connection indicates, that with a higher economic distance the

probability increases that a JV will be chosen over a WOS. Nevertheless, the variable is not

statistically significant. Thirdly, institutional distance at the year of entry

(institutionaldist_entry), is investigated. In models 3, 4 and 7, we find a negative

relationship between institutional distance and our dependent variable. In model 6, the

relationship turned positive. The variable was not significant in any of the models tested.

The negative relationship is in accordance with our hypothesis stating that there is a higher

likelihood of choosing JV with an increasing institutional distance. Lastly, the coefficient of

political distance at the year of entry (politicaldist_entry), shows a positive relationship in

model 3, 4 and 7, and a negative relationship in model 6. The negative relationship in

model 6, is in line with our hypothesis. This implies an increase in the probability of

choosing to enter through a JV when the political distance between the home countries and

China increases. However, the relationship is not statistically significant.

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Hypothesis

Independent

variable

Logistic Regression Results

Expected Sign Observed Sign Significant

H1 International Experience

- - No

H2 Firm size + - Yes

H3 Asset specificity + - No

H4 Cultural Distance - +*/-** No

H5 Political Risk - +*/-** No

H6 Economic Distance - - No

H7 Institutional Distance

- +**/-* No

* Statistical results from models 1 – 4 and 7, ** Statistical results from models 5 and/or 6

Table 9 - Results of the Logistic Regression Models

Control variables. The control variables, which will not be further analysed in chapter

5, were included in every model. In other words, the variables year of entry (year_entry),

country and industry were part of models 1-6. In model 7, dummy variables were used for

the variables year of entry and home country (see appendix G). In models 1-4, the

coefficients of year of entry and industry had negative signs, while the country coefficient is

positive. In model 5 and 6, industry was omitted from the logistic regression because the

sample largely consists of manufacturing companies. In model 6, the country coefficient

turns negative. The only significant control variable is year of entry, in three of our six

models. When running model 7, some country and year dummy variables were omitted

due to multicollinearity. Hence, the sample size decreased. The output showed that the

relationships between variables as well as the number of significant variables did not

change. In other words, the inclusion of these variables do not influence our analytical

interpretation. A similar model including asset specificity was tested. Since the sample was

reduced to mostly manufacturing companies, the smaller sample size resulted in an

omission of many dummy variables, where it was no longer possible to run the model.

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Statistical Test Results. In table 10, the results of the different tests conducted in Stata

can be found. These tests allow us to compare the different models (except model 7, which

has a unique sample) and choose the models which are the most appropriate for further

analysis. According to the McFadden’s R2, the Cox and Snell R2 and the Nagelkerke R2,

model 4 and model 6 have the highest values compared to other models in their respective

samples. The Hosmer-Lemeshow goodness of fit test shows that model 2 and 3 have the

highest goodness-of-fit. However, all models used have a fit at an overall acceptable level

when comparing several tests. The values of the Akaike (AIC) and Bayesian Information

Criterion (BIC), show that model 2 using our first sample, and model 5 using our second

sample, are the best since the lowest AIC or BIC is preferred. Another test performed was

the Likelihood Ratio (LR) test. However, this test could not be performed for Model 7

because the sample size was different due to the omitted variables. The results of the LR

test (see appendix H) show that model 2 is the best followed by model 4 in the larger

sample size. Between model 5 and 6, the former was shown to be better. Overall, it has to

be added that all these tests have to be regarded with caution. The reason is that they often

deliver contradicting results, as shown in table 10. We decided to focus on model 4 and

model 6 in our following analysis since these models contain all variables. Overall, they

also deliver good results in the tests. Even though other models also provide good tests

results, we noticed that differences in results between these models and the full models are

very small and therefore we decided to concentrate on the models which includes all

variables and delivers a complete picture.

Test Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 McFadden’s R2 0.089 0.251 0.109 0.271 0.322 0.363 0.343 ML R2 (Cox and Snell)

0.088 0.229 0.107 0.245 0.332 0.366 0.315

Cragg-Uhler (Nagelkerke R2)

0.136 0.355 0.166 0.379 0.465 0.511 0.471

Hosmer-Lemeshow (Goodness-of-fit)

0.5101 0.6263 0.6450 0.5596 0.5412 0.0915 0.5863

AIC 1.014 0.880 1.061 0.928 1.115 1.215 1.148 BIC -427.480 -437.691 -410.974 -421.010 -137.545 -124.361 -305.417 Number of observations

117 117 117 117 53 53 104

Table 10 - Statistical Test Results

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Multicollinearity. As already discussed in chapter 4.1.1, multicollinearity is evaluated

through the Pearson correlation matrix, which also indicates the significance of

correlations, shown in table 6. As illustrated, several correlations are statistically

significant at a significance level of 0.05. Moreover, the variables cultural distance and

economic distance have very large standard errors (in relation to their coefficients). We

suspect that this is due to multicollinearity being present in our sample. The Pearson

correlation table also indicates that multicollinearity is present between some variables. As

already discussed, several external variables show strong bivariate correlation values in the

correlation matrix. The standard errors of coefficients have a tendency of being very

inflated when a severe degree of multicollinearity exists. This could lead to very unreliable

estimates in logistic regressions (UCLA, 2017). Dropping different pairs of external

variables improved the standard errors as well as the overall fit of the model. However, the

relationship between different variables did not change, hence the interpretation in

previous sections still remains. For instance, we achieved a better fit in the Hosmer-

Lemeshow test when we only included cultural distance and political distance as external

variables. A better fit was also achieved in a model including only institutional distance

and political distance as external variables. In some models where different variables were

dropped, political distance became significant. Nevertheless, as the omission of possibly

relevant variables lead to an incomplete model, we decided not to follow or include any of

these models.

Heteroskedasticity. The non-constant variance of error terms, known as

heteroskedasticity, can result in a logistic regression consisting of parameter estimates

which are misleading and biased (Williams, 2015). However, heteroskedasticity is a very

different problem in logit and probit models compared to in Ordinary Least Squares. The

reason is that the dependent variable in the former models measures probability which

makes them very sensitive. This also makes the problem of heteroskedasticity very difficult

to solve (Buis, 2010). We are aware of this issue when analysing the findings of all models.

All in all, most of our statistical results are not in line with predictions outlined by different

scholars. In chapter 5, our results are analysed in greater detail and in connection with the

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interviews conducted with our three case companies. Next, the institutional environment

in China and the backgrounds of our case companies are presented.

4.2 Findings from the Qualitative Part

In the first section, the institutional and regulatory environment which Scandinavian

MNEs in China are facing, is described by information collected through a written

interview. This was conducted with Muriel He, who works as an associate at the Global

Law office in Shanghai in China. The regulatory process is outlined in order to understand

the regulatory framework which Scandinavian firms go through when starting to invest in

China. In the next section, background information of our three case companies is

presented. The idea is to introduce their business concepts and internationalisation

strategies in China. The findings of our case company interviews are presented and

analysed in chapter 5.2.

4.2.1 The Regulatory and Institutional Environment in China

Every company that enters the Chinese market, regardless of the country of origin, has to

go through a multi-step regulatory process with different Chinese institutions. In terms of

record-filing procedures, several steps and applications have to be completed. In order to

set up a new business in China, the foreign company has to apply to reserve its Chinese

company name and applications for incorporation, chop carving and foreign exchange

registration have to be completed (M He, personal communication, 1 March 2017). Chop

carving means that the company has to apply for the authorisation of various documents,

which includes the carving of different seals or chops (Ku, 2011). Furthermore, an MNE

has to register with customs in case the firm plans on importing and/or exporting. Also, a

bank account has to be opened and overall an MNE has to go through the whole record-

filing process of setting up a new business in China. Several approval procedures from

different Chinese governmental institutions have to be completed before a new foreign

business can be opened. Approvals have to be obtained from the National Development

and Reform Commission and from the Ministry of Commerce or its regional branch.

Another essential step is to get a business license from the State Administration of

Industry and Commerce or the local counterpart. Moreover, other materials have to be

collected and completed, as for example a JV contract if relevant, former application

documents to the Chinese authorities, feasibility reports for preparation and/or articles of

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association. It is also necessary to get an approval of the preparation of seals, which is done

with a registration at the Public Security Bureau. Finally, MNEs entering China need to

obtain a foreign exchange registration certificate as well as the approval from the State

Administration of Foreign Exchange to open a foreign currency registered capital account

(M He, personal communication, 1 March 2017). When it comes to restrictions regarding

the industry of foreign companies which plan to enter China, the Catalogue for the

Guidance of Foreign Investment Industries has to be consulted (M He, personal

communication, 1 March 2017). In this catalogue, which is updated approximately every

three years (Kaja et al., 2015), the Chinese government lists industries which are

encouraged, restricted or prohibited. Industries that are not listed in the catalogue are

considered to be permitted. The catalogue is valid for foreign investment activities in

China, which includes the setup of JV or WOS (M He, personal communication, 1 March

2017). Since April 10th 2015, the catalogue contains 349 encouraged industries, 38

restricted and 36 prohibited industries (Huang & Ma, 2016). In encouraged industries, the

Chinese government provides incentives to foreign investment. These can be related to tax

benefits or facilitated approval processes. Foreign companies that operate in industries

which are listed as restricted, have to fulfil specific requirements and face restrictions, if

they decide to enter China. These can include for example the mode of entry, which might

be limited to a JV. The approval process can also take longer (Kaja et al., 2015). Restricted

industries include for example medical institutions, airlines or higher education (Huang &

Ma, 2015). In prohibited industries, the Chinese government does not allow foreign

investment (Kaja et al., 2015) which includes for instance the tobacco industry or online

publications (Huang & Ma, 2015). As shown above, new entrants to the Chinese market

have to go through a rigorous, complex approval process and might be restricted by

regulations related to their industries. This means that the institutional environment may

pose challenges to Scandinavian companies in China. This will be discussed in greater

detail in the analysis of our interviews.

4.2.2 Case Companies

The following section presents background information about the entry mode and

expansion strategies of the case companies, IKEA, H&M and Grundfos, in China. The

information was collected from secondary sources.

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IKEA. The Swedish furniture company IKEA, was founded by Ingvar Kamprad in 1943

and is now owned by the Stichting INGKA foundation (Jonsson, 2008). The firm has 340

stores in 28 countries (IKEA, 2017a), making it the largest furniture retail company in the

world. When it comes to internationalisation strategies, IKEA has used a standardised

concept across all markets regardless of cultural differences. This means that IKEA should

be perceived in the same way in all countries, which is for example reflected by its cost

efficiency and low prices, which are important aspects of IKEA’s company culture. In order

to ensure that the standardised concept is adopted in a new market, knowledge sharing is

an essential part of the company culture and it is also claimed to be an important factor for

the company’s international expansion. Forward knowledge flows about corporate

knowledge, between headquarters and subsidiaries are fundamental across geographical

markets and also necessary to ensure that a market entry is successful. IKEA’s intranet and

manuals are largely used for communication and knowledge sharing of best practices in

different markets. However, the transfer of tacit corporate knowledge is done through

expatriates who educate local employees about the company’s routines and values. Reverse

knowledge flows, mostly related to market and internationalisation knowledge, are also

important for IKEA since best practices in certain markets as well as market entry

experience can contribute to the development of the whole company. Lastly, lateral

knowledge flows and cooperation within IKEA’s geographical regions may also be achieved

depending on the diversity of markets within a region (Jonsson, 2008).

IKEA’s entry into China was through the opening of its first test store in Beijing in 1998.

Thereafter, the company has continued to expand by opening stores in large cities around

the country with an early expansion focus on the eastern part of China. One of the main

challenges of IKEA in China has been to maintain the low price level and target many

people while income levels have been low and import duties high (Jonsson, 2008). When

IKEA entered China, its products were more expensive than the ones of local low-price

competitors, which lead IKEA to cut prices to become profitable (Ringstrom, 2013). The

low income levels made it necessary for IKEA to develop new products which were

particularly made for the Chinese market. Another challenge has been to handle the high

level of competition, where local production and the competence in home interior have

been crucial factors in order to stay competitive with local firms. IKEA has thereby pursued

its strategy of offering products in large volumes and at low prices. Furthermore, trying to

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protect itself from firms copying their products, has also been challenging for IKEA

(Jonsson, 2008). It is important for IKEA to secure its identity across markets, however a

local adaptation is sometimes needed. For instance, larger stores have been built in China

since the country has a higher amount of visitors than in Europe. In addition, new stores

have been located closer to the customers in China, where fewer people own cars

(Ringstrom, 2013).

H&M. The Swedish fashion retailer, which was founded by Erling Persson, opened its first

store in 1947 (H&M, 2017a). The company currently has over 4400 stores in 65 physical

markets and 35 e-commerce markets. It is also one of the leading fashion firms in the

world. H&M Group consists of six fashion brands and one home interior brand (H&M,

2017b). H&M wants to “make sustainable, good-quality fashion accessible to as many

people as possible” (H&M, 2017c, p.1) and the CEO of H&M Group, Karl-Johan Persson,

means that the company applies a philosophy called “democratic fashion” (Chao, 2012,

p.1). This means that H&M wants to sell fashion in a large range of designs and styles at

low prices to everyone. Sustainability is central to H&M’s business and the company has

won several awards for its sustainability work (H&M, 2017d). The company’s sustainability

report shows that it is at the forefront in several areas such as recycled cotton and the use

of renewable energy (Aktiespararna, 2015). In regards to H&M’s international expansion

strategy, products are usually standardised globally however some local adaptation is

sometimes done due to differences in climate across markets (Chao, 2012). H&M expands

rapidly on a global scale by opening up new stores and through the rollout of new online

stores. As part of its expansion strategy, H&M does not own stores but the MNE is settling

leasing agreements. This gives a greater flexibility to the company. Next to its physical

expansion, H&M also expands and diversifies its product range and brands on a

continuous basis (H&M Annual Report, 2016).

In 2007, H&M Group opened its first store in China and ever since then, the company has

continued to expand by opening stores in both large and small cities throughout the

country (H&M, 2017e) with a current number of 455 stores (H&M, 2017f). Before entering

China in 2007, the company was already familiar with the market through sourcing

products from it for 25 years (Hellstrom, 2008). The opening of the many shopping malls

in China has been one of the growth opportunities for H&M. However, the company has

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experienced that other companies have tried to copy their brand in China (Chao, 2012). As

the Chinese market has become more and more competitive, H&M Group has expanded

fast compared to in its other markets and also grasped opportunities in smaller cities,

where competition has not been as fierce (Fickling & Lin, 2014). H&M’s CEO, Karl-Johan

Persson, argues that the tough competition in China means that a high level of engagement

is needed to succeed in the market, which is a why H&M has focused on expanding fast in

the country (Affärsvärlden, 2011).

Grundfos. The Danish MNE, Grundfos, is the largest manufacturer of residential and

industrial pumps worldwide (Tsang & Chong, 2014). It was founded in 1945 in Bjerringbro

by Poul Due Jensen. Today, the company is active in 53 countries through 83 companies

and subsidiaries. The pump solutions produced and sold by Grundfos, are mainly for

buildings and water supply as well as wastewater. Industrial pump solutions are offered as

well. The pump manufacturer entered the Chinese market in 1994 and opened up its first

production facilities in Shanghai three years later in 1997 (Grundfos, 2017a). Since

Grundfos first established its operations in China, the pump manufacturer has built a

dominant position in the high end market with a market share of around 50%. Even

though the prices of its products, are almost twice as high compared to pumps from local

manufacturers, the company build up a strong position which is also rooted in its diverse

product range, high quality of products and the wide range of additional product features

(Tsang & Chong, 2014).

Despite the company’s success in the premium segment, competition from Chinese

manufactures has intensified during the last years. Local firms have learned quickly to

produce low-cost pumps with an appealing design which are “good-enough” in quality

(Tsang & Chong, 2014, p.1) to satisfy the needs of the Chinese customers in the middle

segment. Grundfos approached this challenge by creating a low-cost brand which was not

yet present in the Chinese market. By establishing the new company Emerco, which

emerged from the pump maker DAB that Grundfos had acquired two decades ago, the

MNE was able to serve lower price segments in China as well. With the Emerco brand,

products are priced 20-30% lower than at Grundfos but 10% higher than prices of Chinese

competitors. In order to avoid cannibalisation of products, the two different brands are

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clearly separated so that no link between both companies can be identified (Tsang &

Chong, 2014).

In terms of geographic expansion in China, Grundfos decided to split up its company in

order to separately serve the two very distinct geographic markets. The Eastern and

Western business activities were therefore separated. According to the general manager of

Grundfos China, Humphrey Lau, the great differences in economic development in both

locations made this step necessary. He expressed that “If you can only deliver one-size fits

all, you are bound to fail” in the Chinese market (Lau, 2010, p.1). Both markets are

therefore approached with different product offerings, market approaches, service and

delivery systems (Lau, 2010). Today, this expansion strategy, which also takes Central and

Western markets into account, has paid off as the company is still experiencing solid

growth despite a slowing in the construction sector in China (Grundfos, 2016).

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5. Analysis and Discussion

The following chapter consists of an analysis of the quantitative and qualitative findings of

this research. First of all, the empirical findings presented in chapter 4, are analysed to

determine how different quantitative factors influence entry mode decisions. Secondly, the

case interviews are analysed to understand expansion determinants of Scandinavian MNEs

in the Chinese market. Our conceptual framework is used as a structure throughout the

analysis. In accordance with this framework, both parts of the analysis are divided into an

internal and an external perspective.

5.1 Analysis of Entry Mode Determinants - Quantitative Part

In the next section, the results of our quantitative variables are analysed and discussed in

regards to theory and previous studies.

5.1.1 Internal Determinants

International Experience. As already mentioned, the variable international

experience, has received great attention in entry mode literature. It is embedded in most of

our main theories, namely in Transaction Cost Theory, the OLI framework and the

Resource-Based View. In Transaction Cost Theory, it often measures internal uncertainty

(Zhao et al., 2004) and in the Eclectic Paradigm (OLI) it is part of the ownership-specific

advantages. When it comes to the Resource-Based View, the factor can be seen as one of

the advantages of a firm (Eriksson et al., 1997) or a source of learning capabilities, which

possesses dynamic characteristics (Brouthers et al., 2008). As outlined in chapter 4, the

variable subratio was used to measure the international experience of firms. The observed

relationship was negative but at the same time, the coefficient was insignificant. This

implies that according to our quantitative model, the international experience of

Scandinavian MNEs does not play a role when it comes to choosing between a JV and a

WOS. Since China is a market which is different from many other markets in terms of the

business environment (Chen, 2004), it is no surprise that previous experience might not

automatically impact the entry mode choice in this particular market. The reason is that it

might not be applicable to the unique Chinese market. As the literature displays

contradicting views in the link between international experience and entry mode decisions,

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our result is in line with some previous studies (e.g. Kogut & Singh, 1988, Blomstermo &

Sharma, 2006). Some of these question the importance of international experience in an

entry mode choice since they also found insignificant results. When the negative

relationship is regarded in isolation, few studies came to similar results. For instance,

Wilkinson et al. (2008) investigated the link between equity modes of entry and the length

of the firm’s international experience and found a negative connection. According to

Anderson & Gatignon (1986), a negative association can be explained by the ethnocentrism

of firms. This means that firms with less international experience, prefer to have

employees and managers from the home country in charge of operations abroad. This is

often done in entry modes associated with higher levels of control like WOS. The

ethnocentric perspective might change as more international experience is gained. Later, a

more polycentric view is adopted which allows firms to exploit management capabilities of

locals as well (Erramilli, 1991). In this regard, a negative relationship has a rational behind

it, which has been analysed by different scholars. However, a positive or insignificant

association has been found more frequently (Wulff, 2015b). Furthermore, it should be

noted that the great deviation of findings is rooted in the different measures which have

been used by scholars. These range from ratios similar to the one used in this thesis, to

measures which focus on the absolute number of years of international experience. Most of

these measures are related to experience at the firm level. This approach might leave out

other influencing factors related to behavioural uncertainty. The reason is that personal

experiences of managers can also be a part of the foreign ones. The omission of this

personal aspect, which is more difficult to capture, can distort results given that entry

mode decisions are often made by managers with different prior experiences (Zhao et al.,

2004). When only looking at the sign of the international experience coefficient, our result

is in accordance with findings from other empirical studies. However, our study showed

that the variable does not have an impact on entry modes, which is also in line with some

studies. Our findings might be attributed to the chosen measure of international

experience which might not uncover all aspects of international experience such as on a

personal level.

Firm Size. Due to the frequent use of the number of employees as a measurement of firm

size in literature (Wulff, 2015b), our study also included this variable (employees_entry).

The variable is connected to the Eclectic Paradigm and particularly measured as the

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influence of an ownership advantage (Wulff, 2015b), on entry mode choice. Our empirical

findings show signs of a negative relationship between firm size and an increased level of

ownership control when entering the Chinese market. The relationship remained

significant throughout all models, however the negative relationship is not in accordance

with our expectations. As often hypothesised in previous entry mode research (Wulff,

2015b), we expected firm size to be positively associated with entry mode choice, indicating

that larger firms tend to enter through a WOS and smaller firms through a JV. The variable

is not only related to the Eclectic Paradigm, but also to the Resource-Based View (Quer et

al., 2012, Pangakar & Yuan, 2009). The expectation of a positive relationship is often based

on the argument that large firms have more resources than smaller firms (Pangakar &

Yuan, 2009). Thereby, the size of firms is related to their ability to meet resource

prerequisites (Buckley & Casson, 1998). A vast amount of entry mode studies has included

firm size as a control variable and empirical findings have varied to a large extent. Wulff

(2015b) assessed empirical research on foreign entry mode, and showed that 37.8 % of

studies found the variable to be significant and positively associated with choosing higher

control modes of entry. In contrast, 13.5 % of studies found the relationship between a

higher control mode and firm size to be negative (Wulff, 2015b). This is in line with our

findings. Quer et al. (2012) also found that firm size was negatively related to the likelihood

of choosing to enter through a WOS. Moreover, our findings are supported by Gatignon

and Anderson’s (1988) arguments that large foreign operations are less likely to involve

higher control modes. The reason is that the size of foreign operations seems to force large

MNEs to share their ownership in regards to sizeable projects (Anderson & Gatignon,

1988). As discussed by Wulff (2015b), results concerning the relationship between firm

size and entry mode choice are often unexpected and inconsistent, where the coefficient

seems to be insignificant or positive in a similar amount of cases. Our findings of this

variable indicate that as firm size increases, so does the tendency to enter through a JV.

Quer et al. (2012) argued that “The path to becoming a global player could require [...]

firms to accept a lot of local partners [...]” (Quer et al., 2012, p.11). This argument could

potentially explain the negative relationship observed between entry mode choice and firm

size in our study. Moreover, as the global network of firms may broaden with increases in

firm size, companies may need to share their ownership in order to coordinate large

projects in distant markets like China. Overall, our results are neither in line with the

majority of findings from previous studies nor in accordance with the Resource-Based

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View. However, our findings contribute with useful insights regarding the influence of firm

size on entry mode choice of Scandinavian MNEs in the Chinese market.

Asset Specificity. In two of our models, asset specificity was included in order to

investigate a possible relationship of this very frequently used variable in entry mode

research. It is derived from the transaction cost framework (Wulff, 2015b), and as outlined

in chapter 2, it is the most important dimension of this theory (Williamson, 1989). When

taking on a resource-based perspective, asset specificity can be regarded as an internal

source of knowledge and capabilities which are incorporated in the company’s operations

and strategy. As the Resource-Based View is closely connected to the Eclectic Paradigm by

partly covering ownership-specific advantages, we suggest that asset specificity also plays a

role in this main theorem. The variable has also been used as a measure in models related

to the OLI framework (Wulff, 2015b). This means that it is prevalent in most of our

underlying main theories and its representation and status in entry mode literature is

undeniable. Despite its strong representation in the literature, the is insignificant in both

of our models. It also shows a negative sign, which contradicts our expectations. As shown

in the extensive review on entry mode studies, conducted by Wulff (2015b), many previous

studies came to the same result. In the review, 47 % of 106 studies within the transaction

cost framework, revealed that asset specificity was statistically insignificant, which

supports our findings. When R&D intensity is used as a proxy for asset specificity, the

results align to a larger extent with our outcomes. When using this variable across

frameworks, around 58% of statistical tests showed that R&D intensity was insignificant.

In studies which used the exact same dependent variable as we did (JV vs. WOS), results

were similar (Wulff, 2015b). As outlined in chapter 3.4.4, a range of scholars have found

evidence that asset specificity is an insignificant determinant of entry mode choices

(Brouthers & Hennart, 2007; Wulff, 2016; Brouthers, 2002). The different, inconsistent

empirical findings might again be due to the differences in measures used, as the definition

for asset specificity is not unambiguous (Brouthers & Hennart, 2007). We decided to just

include one facet of this complex construct, by measuring it as R&D intensity. Another

question that remains unanswered is whether R&D intensity of the parent firm, is

appropriate to account for the level of asset specificity introduced in the Chinese market.

This implicitly assumes that the parent company will induce the same knowledge level to

subsidiaries in the foreign market. By entering China, firms may also aim to reduce costs

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and realise economies of scale instead of primarily transferring knowledge, which comes at

a risk. Overall, we come to the conclusion that the relationship of this variable follows the

consensus in empirical research. Nevertheless, we expected a different outcome in terms of

significance due to the importance of asset specificity in the transaction cost framework.

5.1.2 External Determinants

Cultural Distance. The variable cultural distance is embedded in Institutional Theory,

Transaction Cost Theory as well as the Theory of Cultural Distance. The mixed results of

the variable in previous entry mode research (Sousa & Bradley, 2008), are also reflected in

our findings. Although cultural distance is one of the most popular measures which has

been used across different theories (Wulff, 2015b), the relationship between entry mode

choice and cultural distance was found not to be significant throughout all of our models.

These insignificant results are in accordance with findings of Tihanyi et al. (2005). They

are also partly in line with Anderson & Gatignon’s (1988) results, showing that socio-

cultural distance overall does not seem to have a large influence on entry mode choice.

Erramilli (1996) also found the variable cultural distance not to be significant. The fact that

the sample was limited to subsidiaries in Europe, was discussed as a potential reason why

the sample did not contain enough variation in culture, to explain differences in ownership

levels. Erramilli’s (1996) discussion could support our results of insignificance. The

variation in cultural distance between each Scandinavian country and China is relatively

low, which was discovered through our calculations of cultural distance using the Kogut

and Singh index. The reasoning behind our argument is also connected to the fact that

firms from the three Scandinavian countries are characterized by similarities in business

culture (Carlsson et al., 2005). Levitt (1983), means that there is a convergence among

preferences and tastes of people from different countries in the globalisation of markets.

He further argues that this leads to a global commonality across markets. The argument

that cultural preferences are remains of the past (Levitt, 1983), could indicate that the

influence of cultural distance is not relevant and could explain our insignificant results.

Our expectation of a negative relationship between cultural distance and entry mode, was

met in model 6, indicating that a higher degree of cultural distance increases the likelihood

of entering through a JV. Although our results were insignificant, the negative relationship

is in line with results by Kogut and Singh (1988), which showed that a high level of cultural

distance increases the likelihood of entering through a JV. When only regarding the

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direction of the relationship, the result in model 6 is also in line with other scholars

(Shenkar, 2001; Hennart & Larimo, 1998). It could be linked to concepts in Transaction

Cost Theory where JV can be seen as a strategy to deal with uncertainty due to cultural

gaps (Anderson & Gatignon, 1988). Sousa and Bradley (2008) claim that transaction cost

scholars associate a higher degree of cultural distance with increased transaction costs.

This is explained by information costs and the fact that it becomes more difficult to

transfer skills and capabilities across markets. In contrast, model 3 and 4 showed an

insignificant but positive relationship between the dependent and independent variables.

Although insignificant, the positive sign of the coefficient indicates that WOS is preferred

over JV as cultural distance increases. Even though entering through a JV may reduce

transaction costs (Sousa & Bradley, 2008), it means that companies need to share

ownership, control and proprietary assets with a partner (Kogut & Singh, 1988). As

outlined in the literature review, costs of collaboration may increase along with a higher

cultural distance between countries (Brouthers & Brouthers, 2001). This argument

supports a positive relationship, where collaboration costs in partnerships characterised by

a high level of cultural distance, may result in a tendency of choosing a WOS instead of a

JV, when entering China. To sum up, entry mode research shows mixed results in regards

to the impact of cultural distance (Anderson & Gatignon, 1986) and so do our models in

terms the signs of coefficients. Overall, our findings of cultural distance are not in

accordance with most previous studies which have found the coefficient to be significant.

Political distance. The external uncertainty associated with entry mode decisions is

partly captured by introducing the political distance variable. As outlined in chapter 2, it is

mainly derived from Institutional Theory, however it is also partly related to the

transaction cost framework, as it has been combined with asset specificity (Anderson &

Gatignon, 1986). According to Institutional Theory, external uncertainties, including

political risk, may influence entry mode decisions (Brouthers & Hennart, 2007). For

instance, institutional restrictions in the legal systems influence a company to choose lower

control entry modes like JV instead of WOS (Brouthers, 2002). Political risks as for

example corruption (Uhlenbruck et al., 2006) or expropriation (Hennart, 1988) are of

institutional nature and can likewise influence entry modes. Studies found that political

risk can be lowered by entering through for instance a JV (Bradley, 1977; Hennart, 1988).

Overall, this variable is a construct which is strongly intertwined with the institutional

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environment and it is therefore drawn from this extensively researched theory in entry

mode literature (Delios & Beamish, 1999). The results regarding political distance were not

consistent in our models. While the coefficient was positive but insignificant in two

models, it became negative and stayed insignificant in another model. The latter

relationship, but not the significance is in line with our expectations. However, the

insignificant outcome does not follow the transaction cost perspective. Even though many

scholars found a significant (Brouthers et al., 2002) and negative relationship (Luo, 2001;

Gatignon and Anderson, 1988), other studies found results that reflect our findings. For

example, Quer et al. (2012) concluded that political risk does not influence the entry mode

decision between a JV and a WOS. However, it has to be taken into account that this study

looked at Chinese firms which invested abroad. This can lead to different results than

expected from our sample which consists of Scandinavian firms. In general, it is notable

that our sample solely concentrates on Scandinavian firms engaging in China which can

yield different results compared to other studies. The latter often included a wider range of

either home and/or host countries. Our result might have also been influenced by the

inclusion of other external variables that measure similar effects. For instance, political

distance and institutional distance can exhibit similarities. We also observed

multicollinearity between some variables. When we dropped different (mostly external)

variables from the model, we noticed that political distance became significant. However,

as the omission of potentially relevant variables provided an incomplete model, we did not

choose to follow or include any of these models. Furthermore, we did not include a variable

which measures an interaction between country risk and asset specificity, as proposed by

Transaction Cost Theory (Anderson & Gatignon, 1986). This could have influenced the

result of the political distance variable as well. It is argued that the higher the combination

of external risk measures of political and economic nature with asset specificity, the more

likely it is that an entry mode with a higher control is chosen. Thus, it is argued that

external uncertainty only plays a role in interaction with a high level of asset specificity

because then control is needed. When external unpredictability is regarded in isolation, it

may become difficult to observe a relationship as a higher level of uncertainty does not

necessarily change the “default option”. This means that companies normally enter with a

low control entry mode to hedge against external risks (Anderson & Gatignon, 1986). All in

all, we can say that our results do not reflect most previous empirical findings. This may for

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instance be rooted in our measure, the choice of home countries as well as host country

and/or the correlation with other external variables.

Economic Distance. The variable economic distance, was included to examine external

uncertainty in terms of differences in the economic environment between the host

countries and China. The variables GDP and GDP growth have been used frequently as

control variables in previous entry mode research (Wulff, 2015b). Tsang & Yip (2007)

claim that distance in terms of culture has frequently been measured, however scholars

seem to have paid much less attention to differences in economic development between the

domestic and the foreign market. An understanding of this variable is important in several

ways as it could affect a company’s foreign operations. For example, differences in overall

salary levels between home and host countries are influenced by phases of economic

development and other macroeconomic aspects (Tsang & Yip, 2007). As previously

mentioned, we used the natural logarithmic difference in real GDP per capita, as a proxy

for the economic distance between the home country and China, at the year of entry. The

variable is embedded in Institutional Theory, where we examine how formal institutions

may reduce uncertainty in regards to the direction of economic development. We argue

that economic distance can also be seen as being partly captured by the Eclectic Paradigm,

in regards to location-specific advantages. Moreover, there seems to be a connection

between economic distance and Transaction Cost Theory, where transaction costs can be

lowered depending on the role of institutions (North, 1991). In some of our models, the

negative relationship which was found between economic distance and entry mode choice,

is in line with our expectations in terms of the sign. Nevertheless, the coefficient was not

found to be statistically significant throughout any of our models. It has been argued that

companies tend to prefer entering host countries with stable economic, political and

culturally similar conditions through a WOS (Brouthers, 2002; Kim & Hwang, 1992). This

argument could potentially support our findings of a negative relationship, indicating that

a larger economic distance increases the likelihood that Scandinavian firms choose a JV

rather than a WOS, when entering China. As mentioned earlier, several scholars examined

the influence of economic distance on the entry mode outcome in different ways (Tsang &

Yip, 2007; Johnson & Tellis, 2008). Nevertheless, few researchers seem to have

investigated the direct effect of the variable on an entry mode choice between a WOS and a

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JV. Our thesis contributes to filling this research gap and provides an understanding of the

effect of economic distance on entry mode choice.

Companies have less difficulties when dealing with host countries which have a shorter

economic distance to their home country (Johnson & Tellis, 2008). Therefore, we suggest

that they would prefer to enter through a JV when the distance is higher, which supports

the sign of the coefficient in our study. Overall, our findings are only in line with our

expectations in regards to the sign of the coefficient. The reason is that our findings were

not significant and do not show any connection between economic distance and

Institutional or Transaction Cost Theory. A possible explanation for our insignificant

results could be that, although the economic distance between China and the home

countries may have been high at the time of entry, the expected GDP growth of China as an

emerging market might have led to a different focus. It is possible that the companies have

focused more on China’s expected growth rather than the real GDP per capita difference, at

the time of entry.

Institutional Distance. Another external variable, which was tested in four of our

models, captures the institutional distance between the home and the host country. The

variable is derived from Institutional Theory. By introducing this variable, we complement

other external measures as for instance cultural distance (Xu & Shenkar, 2002). Thereby,

we broaden the view and account for the complexities associated with China’s institutional

environment. Institutional Theory should be combined with Transaction Cost Theory

because it builds the framework in which transactions take place (North, 1990). Therefore,

we also draw a relation between these two theories. The institutional context affects entry

mode decisions together with transaction cost features and the cultural context (Brouthers,

2002). Moreover, we suggest that the Eclectic Paradigm can be related to this external

variable because institutional factors play a determining role when it comes to location-

specific advantages of the host country. As presented by Wulff (2015b), institutional

distance has not been used very frequently as an independent variable in empirical entry

mode studies, although it has been more prevalent in theoretical studies. Capturing this

factor from the former point of view, therefore supports us in understanding the nature of

this construct as well as its relation to the choice of entry modes. It also contributes to

literature by giving new insights.

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Our empirical results of the coefficient showed a negative sign in three models, however it

was not significant. When only looking at the sign of the coefficient, it is in line with our

expectations. A negative sign means that a higher distance in institutions, increases the

probability that a JV is chosen over a WOS. As explained in chapter 2, companies would

rather choose entry modes which imply lower levels of control when entering a country

that has a great institutional distance (Anderson & Gatignon, 1986; Agarwal &

Ramaswami, 1992; Hill et al., 1990). Kostova and Zaheer (1999) argued that MNEs

experience more difficulties in terms of understanding the foreign environment as the

institutional distance increases. Moreover, in a context of larger institutional distance,

MNEs find it more challenging to adjust to legitimacy requirements in the host country.

These previous findings and arguments support the negative relationship found in our

study. Our result could also be explained by the fact that a JV allows firms to share some of

the investment risks (Agarwal & Ramaswami, 1992), associated with a higher institutional

distance, with a partner in China. Moreover, partner firms may help each other increase

their bargaining power when it comes to negotiating with the Chinese government.

However, our result is not statistically significant and the hypothesis is therefore rejected.

Again, it is possible that the proxy used for institutional distance, namely scores from the

Index of Economic Freedom, does not completely manage to capture the complex

construct of the institutional environment. Furthermore, as the variation in institutional

distance between each Scandinavian country and China may not be large, it could be

difficult to capture the subtle differences in entry mode choices. All in all, we can say that

the observed relationship is in line with previous literature and our expectations of the

sign. However, the coefficient was not significant. The reasons for that may be various and

for example rooted in our chosen measure, related to our sample or to the fact that this

variable does not have explanatory power in our specific study.

Control variables. When looking at the relationship between entry mode choice and the

independent variables included in our models, some comments can also be made about the

performance of the control variables. The variable industry, which is a very frequently used

control variable in entry mode research (Wulff, 2015b), distinguished between firms from

the retail/wholesale and the manufacturing industry. Wulff (2015b) investigated some of

the most popular variables included in empirical entry mode research, and did not find

strong results of industry variables. This is in accordance with our result of the industry

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variable, which was found not to be significant in any of our models. In accordance with

Wulff (2015b), who included a measure to control for differences between home countries,

we included another control variable in our models, namely country. The coefficient was

not significant, which means that the home country does not have an effect on the choice of

entry mode in our study. In terms of the last control variable, year of entry, the coefficient

was significant in three models. A negative relation was shown, which implies that

Scandinavian companies prefer to enter through a JV over a WOS with increasing time

from 2007 to 2017. However, this does not align with our understanding as China has

opened up to investments and industries more and more over time. This makes it easier for

companies to enter through a higher control mode.

5.1.3 Summary of the Quantitative Analysis

The quantitative results of our study have been analysed and discussed in the context of

theories included in our literature review as well as relevant empirical research. Moreover,

the quantitative findings have been analysed on the basis of our conceptual framework,

which captures both internal and external factors that may influence entry mode decisions.

The aim has been to provide reasonable suggestions and explanations of the results and

findings of our models. As discussed in the previous sections of this chapter, researchers

have used many variations of measurements for the variables included in our study.

Hence, we are aware that a modification of these measurements and our sample may

influence our results. Overall, we do not find support for most of our expectations. This

could be due to the high level of correlation between some variables and suspected

multicollinearity in our models. It can also imply that, according to our study, the selected

variables are not relevant in the entry mode choice. In contrast, we found that some of the

relationships were aligned with what we expected even though we could not find statistical

support for it. The next section provides an analysis of the qualitative findings. Thereafter,

the quantitative and qualitative analyses will be combined in order to answer our research

question of how different factors influence the entry mode and expansion strategies of

Scandinavian MNEs in the Chinese market.

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5.2 Analysis of Entry Mode and Expansion Determinants - Qualitative Part

In the following section, our findings from the case interviews with Bengtsson and

Maynard from IKEA, Eistrand from H&M and Kiaer from Grundfos will be analysed (audio

files are provided in addition to the appendix). The qualitative findings are analysed in

connection with theory and previous research. The chapter is divided according to our

conceptual framework. Both internal and external entry mode and expansion determinants

as well as challenges experienced by the case companies in the Chinese market, are

analysed. Even though this chapter primarily concentrates on influencing factors in

expansion, we regard market entry as a part of the expansion process as suggested in the

framework by Cui (1998).

5.2.1 Entry Mode and Expansion Strategies

As argued by Werner (2002), several internal and external factors are predictors of a

company’s entry mode decision. The three case companies included in our case studies

entered China at different points in time. Hence, variations in the external environment in

terms of the economic, political and regulatory environment have influenced their entry

mode decisions in different ways. At the same time, internal parameters, such as the

company’s business model or concept, are also likely to affect the timing and strategy of

entry and expansion. None of the interviewees were working at the case companies at the

time of entry, however they were still able to provide us with insights regarding the entry

mode strategies. As outlined in chapter 4.2.2, IKEA opened its first store in China in 1998

(Jonsson, 2008), through a shared ownership, however the company does no longer have a

Chinese partner. Legal counsel, Charlotta Bengtsson, described how both external and

internal factors influenced the company’s decision to enter China. First of all, the concept

that IKEA should be “for the many people” was described as the basic background for

entering the country since China has a very large population. Secondly, the reason for

entering through a JV was a consequence of the legal limitations in China at the time. Both

Bengtsson and her colleague Simon Maynard, who is a Vice President in Retail Property

and Expansion at IKEA, explained that the JV entry mode is neither a common nor a

preferred form of entry for IKEA. The company normally enters through a WOS. This is

also the case for H&M, which was able to enter the Chinese market through a WOS in 2007

(H&M, 2017e). Maria Eistrand, who was a Real Estate Manager for H&M in South East

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Asia at the time of the interview, described how the company was not bounded by any

industry-specific legal restrictions such as license barriers. The differences in entry mode

possibilities described above shows how two MNEs from the retail/wholesale industry

have been influenced by the institutional environment in China at different points in time.

These findings are in line with Luo’s (2007) arguments that barriers to entry and

regulatory limitations have become less strict, particularly in regards to WOS, where China

has opened up more industries to foreign firms. Compared to IKEA, H&M’s opportunity of

entering through a WOS also confirms that the retail industry has become less restricted

when it comes to entry mode choice (Luo, 2007). Furthermore, differences between

industries become evident when looking at the case of Grundfos. As described by Sales

Director of Grundfos China, Peter Kiaer, the company entered China in 1994 through the

establishment of a WOS. Kiaer explained how Grundfos did not have any restrictions in

terms of entry mode choice since the company was not part of a so-called strategic industry

in China. Prahalad and Doz (1987) argue that host governments often limit the scope for

integration in efforts to protect the national development. The industry restrictions

described by the case companies are also in accordance with information provided in the

interview with associate Muriel He, from the Global Law Office in China. The associate

described how the Chinese government lists regulations related to foreign investment

activities in certain industries. The entry mode restrictions outlined by the case companies

can be connected to Institutional Theory, where a country’s institutional context affects

firms’ boundary choices (Brouthers & Hennart, 2007). According to New Institutional

Theory, the limitations described by the case companies are examples of regulative forces

(Scott, 1995), which previous scholars found to have a larger influence on entry mode

choices than normative forces (Makino & Yiu, 2002). The level of constant interaction with

the government increases with an industry characterised by many regulations.

Nevertheless, government interaction is essential for MNEs operating in China (Chen,

2007).

In regards to expansion strategies, all three case companies have continued to expand in

China, to a large degree since their initial entry. As outlined in the literature review,

companies go through four stages when expanding in the Chinese market. In the

preparation stage, it is important to gain knowledge about the new market and assess the

right time and place of entry (Cui, 1998). This theory is supported by Bengtsson, who

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meant that thorough studies were made before entering China. More specifically, she

explained that it was important for IKEA to understand the living situation, needs and

preferences of the Chinese customers, not only at the time of entry but also in the coming

decades. Moreover, she meant that building up the IKEA brand in a new market, is a

process that takes several years. Eistrand described how H&M also prepared and made

thorough research in their assessment of optimal store locations in China. For instance, the

company examined GDP growth, the size of the population as well as the fashion level in

different cities before entering and expanding in market. According to Cui (1998), the next

expansion stage, known as the entry stage, can be quite challenging when dealing with

regulations and bureaucracy of the Chinese market. This is evident when looking at the

way IKEA in which was limited in their entry mode choice due to regulations in the

industry. According to Cui (1998), the third stage, known as expansion, is characterised by

an incremental commitment of resources where some important aspects involve

monitoring economic trends as well as the environment in the host country. In this way,

market opportunities can be seized. Nevertheless, regional differences in terms of for

example demand and economic development should also be taken into account when

deciding on an expansion strategy (Cui, 1998). This is in line with Lau’s (2010) argument

that a strategy needs to be adapted when it is used in different parts of China. In

accordance with Cui (1998), Bengtsson explained that IKEA’s expansion strategy in China

is based on where people live as well as where there is potential in terms of demand. In this

sense, she meant that there are huge variations between regions in China. Moreover,

external factors may sometimes limit expansion. An example is the fact that Chinese

regulations do not allow foreign investors to own land, but they may lease it on a long-term

basis from the government. In addition, Bengtsson and Maynard explained that the cost of

land is increasing. These factors make it essential for companies to thoroughly investigate

the market before making long-term resource commitments. The two IKEA interviewees

both pointed out the need of abundant resources when expanding in new markets. These

arguments are supported by the Resource-Based View, where the VRIO framework

highlights the significance of resources and capabilities of firms (Keillor & Kannan, 2011).

As outlined by Cui (1998), changes in the external environment influence a firm’s

expansion decision. Maynard meant that China is going through great changes where the

country has become one of the biggest players in global markets. For instance, he

mentioned increases in wealth where the population and cities are growing each year. The

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huge market of China creates expansion opportunities (Cui, 1998). However, Maynard

mentioned that it also takes time to understand the scope of the market as well as how to

operate and expand in it. Eistrand, Maynard and Kiaer all described how H&M, IKEA and

Grundfos did not expand rapidly in the first few years after entering China but that it has

been an incremental commitment of resources. Kiaer said that although Grundfos’

investments were made in phases, a significant investment was needed up front in order to

establish operations in China. The company cases illustrate the Chinese expansion as being

a gradual process, which is in line with theory (Johanson & Wiedersheim-Paul, 1975).

Moreover, growth and wealth increases in China may be connected to the Eclectic

Paradigm, where foreign companies have been presented with more location-specific

advantages along with the development of China’s economy. In the last stage of expansion,

known as the experienced stage, companies which have entered a market successfully,

often regard the foreign market operations as an important part of the firm’s global

strategy (Cui, 1998). Our three case companies have been operating in China for at least a

decade and the interviewees all describe their firms as having reached this stage of

expansion. For instance, Kiaer meant that Grundfos’ current market-driven expansion

strategy has a clear purpose of making the company the leading pump manufacturer across

all segments in China.

5.2.2 Internal Determinants

International Experience. When entering and expanding in the Chinese market,

previous multinational experience of foreign/Scandinavian firms might play a role and

determine the success or failure of MNEs at later stages of the expansion process. All of our

case companies had previous international experience, which means they had expanded to

other foreign markets before targeting the growing Chinese market. For instance, IKEA

had already expanded to the United States, and a number of European markets in the

1980s (IKEA, 2017b). The expansion of H&M accelerated in the 1990s, where many new

stores in different European countries opened up (H&M, 2017g). In 2000, the fashion

retailer started its expansion to the United States, which was its first foreign market

outside of Europe. As a next step, the company expanded to China and Hong Kong (H&M,

2017h). Our third case company, Grundfos, also gained international experience before it

decided to tackle Asia and particularly the Chinese market (Grundfos, 2017b). Did this

extensive previous multinational experience in non-Asian markets affect the entry mode

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and mainly expansion strategies of our case companies? And if so, is it a determining

internal factor for companies from Scandinavia which decide to go to China?

As outlined in previous chapters, international experience has been examined extensively

in entry mode literature and specifically in a row of empirical studies. The dominant

results of different studies point to choosing entry modes with higher levels of control

when a firm is more experienced in international settings. Our quantitative study did not

support this prevailing view. However, it seems like this variable has rarely been connected

to expansion strategies of multinationals in China. As MNEs go through different stages in

expansion, international experience might not be relevant in all of these stages. Especially

in the experienced stage, this factor can become negligible, as discussed later. Overall,

there was no unambiguous consent between all interviewees that this factor is essential in

the entry and expansion process. On the one hand, Bengtsson pointed out that

international experience has indeed contributed to the successful expansion of IKEA in

China. She especially put emphasis on the fact that a mixture of previous knowledge in

terms of internationalisation and new knowledge gained in China became important.

Knowledge sharing, as a part of the expansion process, has also been key in order to learn,

develop and expand successfully. This hints at an elevated importance of this factor,

especially during the first expansion stages. While referring to other determinants,

Bengtsson made clear that international experience was a contributing factor but not the

only determinant of success. Maynard stated that IKEA’s international experience has

helped the company in establishing a position and gaining market share in China because

it supports firms in “going in with your eyes open”. However, he was also convinced that,

having worked in seven Asian countries, each of them is so distinct in terms of for example

culture, regulations and politics that it is often not possible to adopt the same expansion

strategies to different Asian markets. According to this perspective, previous international

experience may only explain a company’s expansion strategy, process or success to a

limited extent. Maynard also mentioned that there is naturally some knowledge which a

company gains in each new market. This knowledge can to some extent be useful in a

continuing expansion across national borders. However, experience gained in a particular

country, for example in China, is much more important for growth in this specific market.

He provided the example of India, in which IKEA recently decided to enter (BBC, 2016).

Maynard meant that the Asian country is so distinctively different from China that IKEA’s

previous international experience might not contribute a lot to a successful entry and

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expansion. Maynard’s view hints at a subordinate role of international experience also in

earlier stages of expansion. This is in contrast to Bengtsson’s viewpoint. From the

perspective of H&M, Eistrand explained that the company’s international experience has

indeed supported H&M in entering and expanding rapidly as well as successfully in China.

This means that especially during early expansion stages, the factor played an important

role. More importantly, she stressed that firm-specific knowledge has been a determining

internal factor in expansion. As international experience can be labelled as a part of this

overriding aspect, it can be considered as an important sub-factor in the internal

perspective. Eistrand emphasised that H&M’s global experience supported the firm in

implementing a standardised approach towards different markets. This also fostered a

successful entry and a continuous expansion in China. Overall, Eistrand’s view is in line

with the resource-based perspective which stresses the importance of a firm’s internal

capabilities in the internationalisation process (Barney, 1991). In regards to Grundfos,

Kiaer mentioned that the company’s international experience was indeed useful in the

expansion to China. Grundfos had previously been present outside Europe and the

company applied a generic model when setting up operations in China.

The analysis of the case interviews does not deliver a clear-cut result. On the one hand, it

was expressed that international experience is often related to a specific market and

therefore it becomes difficult to transfer it to other, distinctively different, countries. On

the other hand, many of our interviewees acknowledged the importance of this factor in

terms of expansion to China. In regards to Cui’s (1998) expansion theory, we suggest that

the analysis of our interviews hints at a decreasing importance at later stages in the

expansion process, in for instance the experienced stage. It can be concluded that previous

multinational experience can indeed be determining when it comes to entry and expansion

in China, however the specificities of this market limit the overriding importance of this

factor.

Firm Size. All of our case companies are considerably large in terms of the number of

employees. H&M has about 161,000 employees (H&M, 2017i), IKEA’s number of

employees amounts to 123,000 (IKEA, 2017c) and Grundfos has 18,500 people employed

(Grundfos, 2017a). Their presence in various global markets and their ability to coordinate

activities in different ways, define our case companies as multinational enterprises (OECD,

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2008). According to various studies, a larger firm size is associated with entry modes with

a higher level of control (Brouthers & Nakos, 2004). However, the factor does not seem to

have been analysed in connection with later stages of expansion in a market. Especially in

the interview with H&M, it was emphasised that firm size also played an important role in

their expansion in China. Eistrand pointed out that the connection of firm size with other

factors like international experience and firm-specific know-how, was essential in

expansion. She mentioned that H&M’s long journey of growth and expansion, overall

helped them in becoming successful in China. Eistrand compared H&M to some of their

competitors which have a much smaller firm size and are not present in the Chinese

market. She stressed that they would face a number of problems, connected to for example

a lack of knowledge and experience, when entering and expanding in China. Occurring

problems might be difficult to tackle without a given experience or size. In line with

arguments by researchers, large firms tend to prefer higher control modes in foreign

markets (Brouthers & Nakos, 2004). This could be connected to the fact that they have the

possibility to make use of more resources, connections and networks. Therefore, they are

able to use their power in terms of lobbying, which was also mentioned by Eistrand. In the

interviews with Grundfos and IKEA, the factor firm size was not discussed in great detail.

However, in some interviews it became clear that there is a strong connection between firm

size and other internal factors, such as international experience and knowledge of the firm.

The combination of internal factors might enable a firm to successfully expand in a foreign

market. Examining this factor and its effect on expansion in isolation was not possible

during the interviews with IKEA and Grundfos. However, by combining it with the internal

factors international experience and firm-specific know-how, a more direct influence can

be depicted. Overall, it can be concluded that firm size plays a role in expansion.

Nevertheless, it cannot be considered an overriding internal factor.

Firm-Specific Know-How. According to the Resource-Based View, firm-specific

knowledge is an example of a resource (Wernerfelt, 1984). As outlined in chapter 2,

scholars have suggested that resources can help companies to compete successfully in

international markets (Brouthers & Hennart, 2007). When examining the most important

internal determinants of entering and expanding in the Chinese market, our interviewees

all mentioned different crucial aspects. However, there was a common agreement that

firm-specific know-how has helped the case companies when internationalising in the

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Chinese market. As argued by Caves (1980), resources consist of tangible and intangible

assets that are closely related to the firm. Our case interviews confirm this statement in

regards to firm-specific know-how, where both types of resources are mentioned. First of

all, Bengtsson and Maynard said that IKEA’s people are an important resource for the

company and a determinant of success. Maynard mentioned that IKEA needs people with

experience from other Asian countries. The reason is that they can help the company

understand the environment and how to do business in China. Bengtsson explained how

IKEA is good at finding people who fit the company’s values, and that a lot of investments

are spent on educating and developing employees. She claimed that the well-educated staff

is a resource. In addition, she meant that it is a resource which is desired by many players

in the market. Not only did she think that there is a good match in values between IKEA

and its employees, but also in values between IKEA and China. This belief is in line with

previous research related to the Resource-Based View, stating that a company can succeed

in a new market if its internal capabilities match the external environment in the host

country (Conner, 1991). As previously mentioned, Eistrand emphasised the importance of

firm-specific knowledge when speaking about internal determinants of H&M’s expansion

in China. She mentioned the flexibility of H&M’s store design, multinational experience

and global standard of for instance sourcing processes, as examples of firm-specific

knowledge that has helped the company when entering new markets. She further believed

that H&M’s long experience from other markets, creates a competitive advantage in

relation to other Scandinavian retailers which have not yet expanded to China. Kiaer, from

Grundfos, mentioned the company’s products as the most important internal determinant

when expanding in China. He said that its firm-specific knowledge consists of technology

which creates high-quality products. In turn, this creates a strong brand which is

associated with a high level of trust. Moreover, he explained how Grundfos has been able

to create speed, agility and autonomy of operations in China. Overall, all interviewees

emphasised the importance of firm-specific know-how as an internal determinant when

expanding in the Chinese market. Moreover, the findings of the interviews support the

Resource-Based View when it comes to the fact that resources and capabilities can help

companies succeed when competing in international markets (Brouthers & Hennart,

2007).

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Organisational Structure. When assessing the influence of internal factors when

entering and expanding in the Chinese market, the organisational structure of our case

companies was also investigated. According to the Eclectic Paradigm, ownership

advantages can consist of intangible assets such as a company’s culture (Peng & Meyer,

2011) and organisational capabilities, are an important part of analysing a firm’s

ownership advantages (Roth & Jackson, 1995). As described in chapter 4.2, knowledge

flows and experience sharing across geographical regions, are essential parts of IKEA’s

company culture and international expansion (Jonsson, 2008). Bengtsson believed that

IKEA’s network structure has had both its pros and cons in regards to internationalisation.

On the one hand, it has made the company stick to its knowledge which has contributed to

its expansion in China. On the other hand, it may create future challenges in regards to the

speed of organisational decision making. Therefore, it is important to find the right

balance between maintaining a network structure while ensuring that processes are not too

slow. The decision making process in various strategic moves in China was also

investigated in the interviews. According to Prahalad and Doz (1987), relationships

between subsidiaries and headquarters need to be flexible and in line with competitive

conditions. Moreover, the most important subsidiaries should be part of developing a

company’s overall global approach if these are expected to perform strategic tasks in line

with the global strategy (Prahalad & Doz, 1987). These arguments are supported by Kiaer

from Grundfos, who meant that flexibility is achieved through the autonomy of decision

making of the Chinese subsidiary. He meant that, as long as there is an alignment on a

strategic level and within boundaries in terms of resources and scope, the headquarters

lets the China team make decisions. Eistrand also explained that H&M’s subsidiaries are

given a lot of authority in the market when it comes to steering and implementing their

expansion strategy. She said that there is a two-way communication, where a subsidiary

team can make a recommendation of an expansion strategy. Thereafter, top management

often challenges the team, however they mostly follow the recommendation given by the

subsidiary. Nevertheless, she said that when it comes to power of attorney or approving

things, such as signing engagements with external parties, this is handled by top

management. Maynard, from IKEA, explained that even though foreign subsidiaries are

supported centrally, they all have their own strategy as each subsidiary knows its market

and conditions of expansion. Bengtsson said that there is some regional management of

the decision process, however she pointed out that major decisions are made on a global

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level. The analysis of organisational structure shows that there seems to be a common

structure where subsidiaries have an influence on various strategic moves made in the host

country. This organisational structure supports the argument that the performance of

subsidiaries can improve through the development of relationships filled with close

integration, control and confidence between the two parties (Child et al., 2003). Overall,

the organisational structure of our case companies, seems to have an influence on their

expansion strategies in China.

5.2.3 External Determinants

Cultural Distance. As outlined in chapter 2.1.6, several scholars have frequently studied

the influence of cultural distance on entry mode decisions (Yiu & Makino, 2002; Agarwal,

1994; Kogut & Singh, 1988; Makino & Neupert, 2000). Moreover, previous studies have

found mixed results between this factor and the level of control in foreign markets

(Erramilli et al., 1997; Shenkar, 2001; Hennart & Larimo, 1998). Most scholars seem to

have focused on entry mode choices when investigating the impact of cultural distance.

The findings of our interviews are more focused on experiences of cultural differences

related to the companies’ expansion in the Chinese market. Cui (1998) means that the

entry stage of expansion involves building relationships with partners and major

government agencies in China. Maynard shared his experience from working for IKEA in

China and agreed that Chinese culture is focused on relationships. Hence, it is important to

understand how to do business in a country that is very different to Sweden, where IKEA is

from. Nevertheless, he pointed out that the collective culture in China works well with the

IKEA culture, since it is characterised by an inclusive business environment. At the same

time, both Bengtsson and Maynard recognised differences in employee culture, where

Chinese workers are not used to working independently to the same extent as Swedish

workers. In terms of consumer culture, the two interviewees from IKEA said that they have

experienced challenges related to the brand perception of the company. The interviews

showed that the idea of being “for the many people” did not work well in the beginning

since IKEA’s products were not affordable for a large number of people. Therefore, the

perception in China was that IKEA was a luxury and aspirational Western brand - a

perception which IKEA did not want to be associated with. As described in chapter 4.2.2,

cost efficiency and low prices are important parts of IKEA’s company culture (Jonsson,

2008). Another cultural challenge experienced by IKEA in China has been the

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implementation of the do-it-yourself concept. Maynard and Bengtsson claimed that

Chinese people are not familiar with this concept as they are used to being provided with a

high level of service at low cost. This cultural difference has also posed challenges related

to home delivery, a concept that is very common in China where cars are not often used for

transporting furniture. In regards to H&M, Eistrand said that cultural differences have

definitely been the main external challenge of H&M’s expansion in China. She meant that

H&M is a generic, open-minded, straightforward and easy going brand and that these

brand characteristics have been difficult to apply to Chinese hierarchical culture. However,

she stressed that the company has not experienced these challenges to a larger extent than

any other foreign company in China. Just like Maynard and Bengtsson, Eistrand also

mentioned the company’s brand perception in China, and said that it might never go

exactly hand in hand with how H&M wishes to be perceived. However, the expansion

strategy definitely has an impact on this perception. Kiaer, from Grundfos, meant that

cultural differences can be handled by being mindful and ensuring that the company works

with people who have previous international experience. He argued that even though there

are cultural differences, the related challenges do not make it difficult to do business in

China. To summarise, it seems like the cultural distance between Scandinavia and China

has influenced and created challenges in regards to the companies’ expansion journey,

particularly for IKEA and H&M. According to transaction cost researchers, the relationship

between a high cultural distance and increased transaction costs is due to information

costs and difficulties of transferring capabilities across markets (Sousa & Bradley, 2008).

The challenges described by some of our interviewees partly support this argument.

Institutional Distance. As examined in chapter 2.1.4, the external factor institutional

distance in relation to Institutional Theory, has received great attention by different

scholars in international business research (Brouthers & Hennart, 2007; North, 1991). As

institutions determine the framework in which companies operate, this factor can also be

related to the expansion in a market. Makino and Yiu (2002), for example pointed out that

institutional forces in the external environment may influence and affect new expansion.

As institutional distance is often connected with economic distance and political (risk)

distance (Delios & Beamish, 1999), these factors will be analysed as well, from an

expansion point of view in our interviews. The factors were also examined in our

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quantitative study, which will allow a more nuanced perspective by comparing both

analyses in chapter 5.3.

Throughout all our interviews, it became evident that institutional forces and the distance

between home and host country institutions, are important factors in the expansion of our

case companies. Bengtsson and Maynard emphasised that China’s multi-level bureaucracy

and a great number of governmental institutions (for example on a central or regional

level), increase the level of complexity in the market. This set-up is a strong contrast to the

institutional environment in Sweden, which Bengtsson labelled as more straightforward

compared to China. Moreover, this institutional structure in China also embodies a very

hierarchical system to which IKEA has had to adapt in its expansion. In negotiations, it is

for example important to send managers that are on the same hierarchical level as

government officials. In this regard, Bengtsson mentioned that sending a store manager to

a meeting with a provincial head of department would be offensive because managers of a

higher level are expected. Furthermore, regulations particular to the retail industry pose

challenges to foreign companies and can slow down expansion processes. Bengtsson

expressed that there are many restrictions and ongoing changes related to regulations, and

that institutional and governmental structures vary greatly depending on the region. This

has also been discussed in chapter 4.2.1. Information provided by the Global Law Office

showed that the regulatory process involves a lot of different steps including approval

procedures and various institutional bodies of the Chinese government. Also, the

Catalogue for the Guidance of Foreign Investment Industries, as mentioned by associate

He, requires foreign firms to continuously adapt to restrictions and regulations. The ever-

changing institutional forces mean that IKEA and other MNEs have to keep up with the

different changes imposed by Chinese institutions. The latter are for instance related to

data protection, security and product labelling, as outlined by Bengtsson. However, she

also highlighted that China is opening up more, which also provides foreign companies

with new expansion opportunities.

In the matter of economic distance, it was accentuated by both Bengtsson and Maynard

that China’s economy grows rapidly which leads to increasing wealth. Kiaer also

recognised a growing demand in China. At the same time, he meant that prices are

increasing and that there is a great openness towards Western products and lifestyle. In

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turn, this signifies that economic distance slowly decreases over time. This could facilitate

the expansion of foreign companies in China in the long-term. Bengtsson pointed out that

IKEA greatly benefits from this development in terms of knowledge creation, talent

attraction and innovation. As mentioned by Bengtsson, China has been the “receiving

country”. However, this is slowly changing and IKEA as well as other companies now also

profit from the growing Chinese expertise. The growing economy in regions apart from the

economically strong urban centres, also opens up new opportunities in expanding across

China once companies have reached the experienced stage of expansion. This has led our

case companies to further exploit opportunities in China.

When it comes to political distance, Maynard underscored that China’s government

opened up more. The importance of getting supported by the government, in order to

expand successfully to new regions, was stressed as well. While governmental approval is

important at early expansion stages, Maynard emphasises that it remains crucial at later

stages of expansion. Eistrand supported this viewpoint from another angle by stating that

operations can be challenging if the government imposes restrictions. Kiaer underlined

that corruption is still prevalent which further increases the gap in political distance. He

also verified Maynard’s arguments by saying that support of the government is

indispensable, especially in difficult times. Grundfos therefore spends a lot of time with

different governmental institutions to develop a partnership and accelerate expansion.

This perspective is in line with Chen (2007), who suggested that companies should interact

with the Chinese government in order to tackle opportunities and threats.

All of our case companies emphasised that the protection of IPR, is still a big issue in China

from an institutional point of view even though improvements have been made. Products

and stores of IKEA, H&M and Grundfos have been copied, however none of our case

companies was so far greatly affected in the long-term by copy-cats. The copying of

products is related to the fact that the case companies are not present in all regions of

China which is again, related to their pace of expansion. Bengtsson underlined that IPR

enforcement is key but often difficult to realise in China, which was supported by Eistrand.

This is in accordance with Child and Tse (2001), who stated that weak institutional

environments can prevent firms from enforcing their property rights, as discussed in

chapter 2.1.5. According to Kiaer, it remains impossible to unveil all IPR violations in

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China and he said that although legal action should be taken, believing that this could fix

all copy cats would be naive. Kiaer also stated that Grundfos does not need to solely rely on

legal action to stop copy-cats because their technological expertise and high quality cannot

simply be copied. However, he means that lower priced copies of Grundfos’ products at a

lower, but still acceptable quality, pose a threat. We argue that the non-enforcement of IPR

protection is an institutional weakness, which can slow down expansion of foreign

companies. The reason is that it can for instance decrease sales, harm brand perception

and hinder growth. In conclusion, it can be stated that the analysis of institutional distance

in relation with economic and political distance, shows that these factors are connected

with the expansion process of Scandinavian firms in China. The rather big institutional

distance between China and Scandinavia poses a number of challenges in expansion but at

the same time opportunities can be exploited.

Local Adaptation. In order to investigate the need for local responsiveness in the

expansion of our case companies in the Chinese market, our interviewees were asked to

describe the degree of local adaptation of the concept and product offering in their

expansion. As outlined in the literature review, internationally established companies are

likely to apply a global strategy. At the same time, it is believed that companies could

perform better by also using a regional strategy since, geographical differences are growing

in importance (Ghemawat, 2005). All interviewees emphasised that the concept of their

companies is the same worldwide, however more or less local adaptations of the product

offering have been made in China. Bengtsson and Maynard explained that IKEA’s concept

has barely been adapted. However, Bengtsson mentioned that China contributes to

developing the overall concept when it comes to understanding new trends, such as new

types of demands in a more fast-paced market. Thus, the Chinese market has also

contributed with new possibilities, designs and materials. Maynard pointed out that some

small product adaptations are made in every country and he mentioned kitchen utensils

and bed sizes as examples specific to the Chinese product offering. Bengtsson explained

that IKEA attempts to be locally relevant in the way products are shown in IKEA’s stores,

and referred to the smaller kitchen size and different use of balconies as examples.

However, both Maynard and Bengtsson emphasised the fact that the same conceptual

product range is provided in any market. Similar arguments were provided by Eistrand,

who claimed that H&M should be a brand that is recognisable to its customers everywhere

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in the world. Nevertheless, she said that some local adaptation is sometimes needed, and

she referred to product offering adjustments related to climate differences between

markets. According to Kiaer, Grundfos has expanded in China in three phases where the

degree of local customisation has increased throughout the years to better fit the Chinese

market. Examples of local adaptations are the increased size and robustness of products.

Although adaptation is important, he meant that limitations are needed from a cost

perspective, where Grundfos can make use of the existing platform and technology when

developing products for China. All interviewees stated that local adaptation has been made

in regards to the marketing and communication channels used in China. For example,

Bengtsson mentioned the change of focus from the traditional IKEA catalogue to the use of

more digital channels. Moreover, Eistrand said that social media and other online media

channels are used to a large extent by H&M in China. As illustrated by our interviewees,

international companies follow a global strategy (Ghemawat, 2005). However local

consumer preferences seem to limit the extent to which this strategy is implemented. The

interviews show that our case companies seem to pursue a strategy mainly characterised

by global integration, where some local adaptation is also used. These findings are a

mixture of standardisation and differentiation strategies described in chapter 2.1.6.2

(Bartlett & Ghoshal, 2002).

Competitive Environment. The internationalisation strategy of a company may be

influenced by industry-specific factors (Werner, 2002), such as the competitive landscape

in the foreign market. According to several studies, entry mode decisions seem to be

affected by domestic and foreign competitors (Brouthers & Hennart, 2007). Moreover, the

competitive nature of a business affects a company’s strategy of local responsiveness and

global integration (Prahalad & Doz, 1987). Based on these arguments, the competitive

environment, was one of the external factors included in the interviews. This was done in

order to investigate its influence on the expansion strategy of our case companies. As

described in chapter 4.2, the competitive landscape in China has intensified and our case

companies have developed strategies to handle the high degree of competition in the

market. For example, local production and competence in home interior design have been

important parts of IKEA’s competitive strategy to offer products in large volumes and at

low prices (Jonsson, 2008). H&M has focused on a fast expansion in China to deal with the

tough competition (Affärsvärlden, 2011). Grundfos created a low-cost brand in order to

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deal with competition from local companies in the lower price segments (Tsang & Chong,

2014). Cui (1998) means that an increased level of competitiveness is a characteristic of the

experienced stage of the expansion process. Just like Grundfos, companies need to

innovate to maintain their market position (Cui, 1998). The findings from the interviews

confirm that the competitive environment in China has changed and intensified along with

the country’s development. Bengtsson meant that IKEA’s competition mainly consists of

small companies and that it is not as organised as in Europe. However, she believed that

competition in China is becoming more structured and as well as increasingly intense.

Maynard said that one of IKEA’s main challenges is the competition for land and

accessibility in a market characterised by fast expansion. Both Eistrand and Kiaer agreed

that the timing of entry played an important role in H&M’s and Grundfos’ successful

expansion in China. This is in line with arguments by Cui (1998), who means that the right

timing is a determining factor in several stages of expansion. Eistrand explained that China

is a market filled with fierce competition and she said that “It was very helpful for H&M to

be on board early on to increase our knowledge as early as possible”. Eistrand continued

to explain that not only is China competitive due to the presence of international brands,

but also due to price pressure since Chinese customers are very price sensitive. In order to

defend its strategy, the company had to work aggressively with pricing. Kiaer from

Grundfos agreed that the timing of entry is important and claimed that “[...] having

factories established early in China has been critically important”. He also said that

competition is getting tougher and that it influences Grundfos in the way that it has to

adapt to the market with a stronger commitment of time and resources. To sum up, there

seems to be a common notion among our case companies that the competitive

environment in China has become more intense. This setting has influenced their

expansion strategies and the importance of entry timing was emphasised.

5.2.4 Summary of the Qualitative Analysis

In the previous section, the qualitative part and therefore the results of our interviews,

have been analysed and discussed on the basis of selected theories and our conceptual

framework. The analysis has been conducted in order to determine factors that influence

the expansion of our case companies and potentially other Scandinavian MNEs in China.

Overall, it can be argued that opinions of our interview partners in regards to different

factors are not the same. However, very often answers pointed in the same direction.

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Three out of our four internal factors, namely firm size, firm-specific know-how and

organisational structure, were found to have a more or less large impact on expansion of

the companies, either in combination or in isolation. For the internal factor international

experience, opinions slightly differed but also pointed to an elevated importance of this

variable in early stages of expansion. All of our external variables proved to be essential

when it comes to expansion in China. Especially cultural distance, institutional distance

and the competitive environment exert a great influence on the expansion strategies of our

case companies. The interviewees also emphasised that various challenges and

opportunities are connected to these factors. In regards to the degree of local adaptation,

we found that the case companies largely make use of a global strategy. In the analysis, it

became clear that some of the factors vary in their degree of influence and some of them

especially play a more important role at later stages of expansion and not at the initial

entry stage. In the following section, the outcomes of both our quantitative and our

qualitative analysis are analysed in comparatively in order derive similarities and

differences.

5.3 Comparison of the Results of our Quantitative and Qualitative Analysis

The internal factors international experience and firm size as well as the external factors

cultural and institutional distance, are shared determinants in both our qualitative and

quantitative analysis. This is also shown in our conceptual framework. Therefore, a

comparison between these factors is possible and is conducted in the following section.

Nevertheless, it has to be noted that the quantitative part focuses solely on entry mode

decisions while the qualitative chapter takes a closer look at expansion strategies. The

remaining factors drawn from our conceptual framework, namely firm-specific know-how,

organisational structure, competitive environment, local adaption and asset specificity are

not used in both parts. Therefore, they cannot not be compared directly. However, the

factors economic and political distance, are partly connected with the shared factor

institutional distance, which facilitates an indirect comparison.

Internal determinants. In regards to the variable international experience, our

quantitative study came to the result that the coefficient is negative and not significant

when a Scandinavian company chooses between a JV and a WOS, as an entry mode in

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China. This proved not to be in line with our expectations, however the result is supported

by some previous studies. The analysis of our interviews revealed that most of our

interview partners considered the factor to be important in order to successfully enter the

Chinese market as well as to expand continuously. International experience was also

considered as a part of firm-specific know-how, which indeed was found to have an

influence on the entry mode decisions and expansion strategies of our case companies.

Hence, this result is in contrast with findings of the quantitative study. However, it was

also highlighted by one of our interviewees that China is a very specific and complex

market. Therefore, previous international experience from other markets may not have a

big impact on a company’s entry and later expansion in China. When regarding

international experience as specific to other countries than China, our quantitative findings

are partly supported. In connection with expansion theories, it also became clear that the

influence of international experience is likely to decrease over time as new knowledge is

acquired in the market. This signifies that in later expansion stages, the factor is less

relevant. All in all, we suggest that even though our quantitative and qualitative findings do

not match perfectly, some support for our quantitative study can be derived. In addition,

new findings related to the connection between international experience and its influence

on expansion strategies, have been identified and presented.

The variable firm size was also discussed in both parts of our analysis. The quantitative

study showed a negative and significant relationship of this variable in relation to a higher

level of control in entry mode. Although the sign of the relationship contradicted our

expectations and the majority of previous studies, some scholars have found that a larger

firm size is associated with a JV mode of entry. In this way, our results provide additional

insights regarding the relation between firm size and entry mode choices of Scandinavian

firms in China. The qualitative analysis also showed that firm size has an influence on

entry modes and expansion strategies of our case companies. However, the factor was

especially discussed in connection with other internal determinants such as firm-specific

know-how and international experience. This means that firm size proved to be an

essential factor in combination with other internal determinants. Thus, by introducing it as

a factor in isolation, we might not have captured the full effect of firm size on the choice of

entry mode in our quantitative study. In later expansion stages, firm size pointed out to be

determining because upcoming challenges and problems can be tackled easier by large

110

firms. This is for example rooted in a higher level of resources, know-how and experience,

which our qualitative analysis revealed as important factors when expanding in the

Chinese market. This was emphasised in one of our interviews, where a direct comparison

to other smaller competitors was drawn. The combined analysis leads us to the conclusion

that firm size has an effect on both early and late stages of expansion of Scandinavian firms

in China. In this regard, the factor might also be decisive when success or failure in

expansion is determined, however it remains as one of many influential variables and does

not alone offer a full explanation of decisions made in entry mode and expansion

strategies.

External determinants. The findings from the qualitative and quantitative analyses

reveal that there are differences in the way which shared determinants influence entry

mode decisions and expansion strategies. First of all, cultural distance was not found to be

significant in any of the quantitative models. This result implies that the factor does not

have an influence on entry mode decisions made by Scandinavian MNEs in China. In

contrast, the qualitative analysis showed that cultural distance appears to have impacted

the expansion strategy of the MNEs. All companies expressed that cultural differences have

created challenges. For instance, the cultural distance between China and Scandinavia

posed challenges related to employee culture, product offering, business concepts or brand

perception. However, the degree of influence from cultural differences varied between our

case companies. Some interviewees expressed that it has been one of the main external

challenges in China, while others argued that it does not largely influence the way of doing

business in the market. Mixed results were not only found in terms of expansion strategies,

but also in regards to entry mode choice. As mentioned above, our quantitative findings

showed insignificant results, however the relationship changed between positive and

negative depending on the model used. Overall, the analyses show that the factor cultural

distance does not influence entry mode decisions of Scandinavian MNEs in China, however

it influences their expansion strategy. This finding implies that the impact of cultural

distance is larger in the later stages of expansion. It is possible that the entry mode

decision is influenced by other factors, such as the regulatory environment, to a larger

degree than cultural distance. In later stages of expansion, cultural differences of brand

perception or product preferences, seem to become more prominent and critical. This

analysis supports arguments by Yiu and Makino (2002), who found that prior to entering a

111

market, normative factors, such as cultural distance, take longer to observe and are more

difficult to identify than regulative and cognitive factors. This could explain why we found

that challenges of cultural distance have a larger influential power in later stages of

expansion.

The second factor which was investigated in both analyses was institutional distance. In

the qualitative part, the factors economic distance and political distance were analysed in

relation to institutional distance. Thus, a comparison of these factors is also made between

the qualitative and quantitative analysis. The findings from the quantitative model showed

that institutional distance does not have an influence on entry mode decisions of

Scandinavian MNEs in China. The relationship between the variable and entry mode

choice was found to be negative. When only looking at the sign of the coefficient, this

indicates that companies prefer to enter through a JV when the institutional distance

increases. However, the coefficient was not significant. On the other hand, our qualitative

analysis showed that institutional distance is an important factor in regards to both the

entry mode decision and expansion of our case companies. One of our case companies was

limited by entry mode restrictions imposed by the institutional environment when entering

China. Nevertheless, it should be emphasised that the entry was made prior to the sample

period included in our quantitative analysis. Moreover, the interviews showed that the

political distance between China and Scandinavia was claimed to have influenced the case

companies’ expansion. Government approval, corruption and IPR protection were some

issues that were discussed. In the quantitative model, political distance was not significant,

indicating that entry mode choice is not influenced by the political distance between the

markets. A similar result was found in regards to economic distance. The interviewees

expressed how the economic development in China has created several expansion

opportunities. The increase in wealth implies that the economic distance between China

and Scandinavia is slowly decreasing over time. Nevertheless, the insignificant result of the

quantitative analysis showed that economic distance had no influence on the entry mode

choice of Scandinavian MNEs. To sum up, the quantitative analysis showed that

institutional, political and economic distance are all factors which do not have an influence

on the entry mode decision in China. Conversely, the qualitative analysis showed that these

factors do have an impact both in the entry stage and the later stages of expansion. In other

words, our combined analysis shows that the institutional environment is not a

112

determining factor in the choice of entry mode. This could be explained by the fact that

China has opened up and become less restrictive towards foreign firms (Luo, 2007) which

means that entry mode decisions has become decreasingly influenced by the institutional

environment in the past decade. At the same time, our interviews revealed that

establishing partnerships with the Chinese government is important. This statement shows

that the institutional environment does have an impact in the later stages of expansion in

China. The above discussion is in line with Dunning’s (1988) argument that location-

specific factors become increasingly important as firms expand.

Overall, the integrated analysis shows that entry mode decisions are influenced differently

in comparison to expansion strategies. The shared factors have more explanatory power in

the expansion phases of Scandinavian firms in the Chinese market. In the next chapter the

concluding remarks of this thesis are presented and the answer to our research question is

highlighted, followed by implications and contributions to literature. In the last chapter,

limitations of this thesis are discussed.

113

6. Conclusion

When a company decides to expand to a new market, the choice of an appropriate entry

mode and a subsequent expansion strategy, is crucial in establishing successful operations

abroad. Especially during the past decades, China’s market size and tremendous growth

have attracted a large number of MNEs to the country. Among these, many Scandinavian

MNEs have entered and expanded in the Chinese market. Given the importance of the

topic in international business literature and its relevance for the internationalisation of

Scandinavian MNEs, this thesis investigated the following question:

How do different factors influence entry mode and expansion strategies of

Scandinavian MNEs in the Chinese market?

In order to answer our research question, we conducted both a quantitative and a

qualitative analysis. First, an array of previous studies related to determinants of entry

mode choices and expansion strategies were reviewed. Research related particularly to the

Chinese market was also examined. The literature review was used as a basis when

developing our conceptual framework, which combined insights from four classical entry

mode theories as well as one expansion theory. Specifically, the Eclectic Paradigm, the

Resource-Based View, Transaction Cost Theory, Institutional Theory and The Evolutionary

Process of Global Market Expansion were included. The conceptual framework was

thereafter used to analyse how internal and external determinants influence the entry

mode and expansion strategies of foreign MNEs in China. As previously mentioned, this

study used two methodological approaches. First, a quantitative analysis was conducted to

investigate determinants of entry mode decisions. A sample including 117 Scandinavian

companies, which entered China in the period of 2007-2017, was used. By collecting

ownership data from various databases and online sources, a dependent variable was

constructed distinguishing between a JV and a WOS mode of entry. Several internal and

external variables were introduced and their influence on entry mode choice was tested by

applying a logistic regression model. In total, seven models were tested. Secondly, a

multiple case study was applied to examine the impact of internal and external factors on

expansion strategies. Interviews were conducted with four representatives from the case

114

companies IKEA, H&M and Grundfos. In addition, a written interview was conducted with

the Global Law Office in China. This was done with the purpose of getting a better

understanding of the institutional and regulatory environment in the Chinese market.

In the quantitative analysis, we did not find statistical support for most of our

expectations. We found evidence suggesting that the variable firm size was negatively

related to the degree of control in the entry mode decision. Despite being statistically

significant, this relationship was inconsistent with our hypothesis. Our expectation was

derived from findings of previous studies and theories such as the Resource-Based View

and the Eclectic Paradigm. When considering the effect of the variables international

experience, cultural distance, political distance, economic distance and institutional

distance, these relationships but not the significance were consistent with our hypotheses

as well as theory in several models. Evidence from certain models suggested negative

relationships between these variables and entry mode choice. This indicated an increase in

the probability of entering through a JV, with increasing values of the variables.

Nevertheless, the findings were statistically insignificant and therefore mostly inconsistent

with theories included in our conceptual framework. When only considering the

relationship between asset specificity and the choice of entry modes, the likelihood of

entering through a JV increased. This relationship was neither significant nor in line with

our expectations. Moreover, the variable did not find support in Transaction Cost Theory,

suggesting that companies prefer a high control entry mode when transferring specific

assets to foreign markets to reduce transaction costs.

By analysing our qualitative outcomes from the interviews, we found evidence that most of

the factors included in our conceptual framework were determining in expansion.

Although opinions among our interviewees varied slightly, it became obvious that

especially the external variables exerted a great influence in different expansion stages of

MNEs in China. These findings were also in line with our five theories and mainly with the

Eclectic Paradigm and Institutional Theory, which put a great emphasis on external

circumstances. Moreover, the internal variables were found to have an impact on

expansion strategies. This was supported by the Resource-Based View. We found that,

especially the influence of internal factors in combination, was key in order for MNEs to

achieve a competitive advantage and successfully expand. The interviews also revealed that

115

some variables, namely institutional and cultural distance, particularly played a role in

later stages of expansion. This contributed with new insights also in comparison to the

results of our quantitative study which solely focused on the initial entry mode decision.

In the comparison of our two different parts, we analysed the variables that were

integrated in both our quantitative and our qualitative analyses, to derive combined

findings. For the factor international experience, we found contrasting results regarding its

influence on entry modes. The quantitative part showed an insignificant relationship while

the interviews pointed to an elevated importance of this factor. However, the interviews

also showed that the importance of previous international experience can be limited due to

the complexity of the Chinese market. This partly supported our quantitative findings. The

variable firm size appeared to be important in both analyses. Hence, we found support that

the factor had an influence on both early and late stages of expansion. However, the

observed relationship in the quantitative part, was not as expected. During the interviews,

it became clear that firm size is especially relevant in connection with other internal

variables. Therefore, it should not be regarded in isolation. The variable cultural distance

showed no significant relationship in our quantitative study. However, the analysis of our

interviews demonstrated that the factor has influenced the expansion journey of our case

companies to a great extent. Our combined analysis highlighted that cultural distance

therefore had a large impact on later expansion stages and not mainly on the initial entry.

The external determinant, institutional distance, proved to be insignificant in the

quantitative analysis. The interviews revealed that this factor had an increasing importance

towards later stages of expansion, which complements findings of the quantitative part.

This result seemed to be rooted in China’s increasing economic openness and the reduction

of restrictions in the past decade. All in all, our interviews showed that the MNEs which

expanded in China encountered many challenges which were mainly related to the external

environment. These were especially connected to distance in culture or institutions.

Opportunities were seized based on different internal and external factors, as for instance

economic growth and China’s greater openness towards foreign investment.

As discussed in chapter 7, this thesis has its limitations. However, it presents several

interesting implications for management practice and future research. First of all, it

contributes to filling a research gap by investigating determinants of both entry mode

116

decisions and expansion strategies of firms. In this way, our research looks at the changing

importance of determinants throughout the whole expansion process - from stages of

preparation to becoming experienced in a foreign market. Secondly, this thesis investigates

entry mode and expansion theories from the perspective of Scandinavian companies,

which have received little attention in previous entry mode research. Since this study does

not cover performance implications of a company’s entry mode and expansion decisions,

future research could add this perspective to a similar empirical study. Future research

may also further explore the influence which other determinants might have on the entry

mode and expansion strategies of MNEs. In terms of entry mode choices, the combined

effect of variables could be investigated. When it comes to expansion strategies, factors

such as managerial characteristics and regional experience could be examined. Expansion

strategies are particularly subject to limited empirical research. Therefore, the influence of

additional determinants could provide managers with a broader understanding of how to

handle challenges related to their expansion in foreign markets. In this regard, our

conceptual framework presents a useful tool for managers in order to identify factors that

have an impact on entry mode and/or expansion strategies. Future research could also

provide a more holistic understanding of this complex phenomenon by integrating more

theories in the conceptual framework. Another proposition for future studies is to examine

the influence of internal and external factors on entry and expansion strategies in other

emerging markets and home countries as well as in other industries.

In conclusion, this thesis has contributed to a better understanding of the

internationalization process of Scandinavian MNEs in China. We find evidence that the

initial entry mode decision is not influenced by most of our investigated internal and

external factors. However, in later stages of the expansion process, these factors gain

influence and create both challenges and opportunities for MNEs in the Chinese market.

Therefore, time seems to play an important role. In later stages of expansion, we argue that

strategies of MNEs are increasingly influenced by internal and external factors as firms

acquire new knowledge, build relationships and interact with foreign partners and

institutions.

117

7. Limitations

It is necessary to point out that this thesis suffers from some limitations. In regards to the

quantitative part, we underline that a generalisation of our results is limited to the time

period 2007-2017. Moreover, our sample only included Scandinavian companies which

have entered China. This makes our quantitative results inapplicable to other, distinctively

different settings and time periods. Moreover, we only included companies with a

minimum of 50 employees, which limits the applicability of our findings to smaller

companies. These may have different priorities, in terms of for example resource

commitment, which in turn could impact the entry mode and expansion strategies of these

companies. Furthermore, we based our quantitative study on secondary data extracted

from databases. On the one hand, this method ensures objectivity. On the other hand, it

limits our selection of external and internal variables. However, we decided to add other

variables in our qualitative part and thereby broaden our scope research. While other

studies made use of surveys to extract a greater variety of variables, we decided to use

secondary data which may have led to different results. In relation to our dependent

variable, we decided to only include two modes of entry while other entry modes are also

possible. These are not examined due to the scope and limited time frame of this thesis. In

our sample, we aimed to include sectors which are not restricted by Chinese regulations in

terms of entry mode. However, for some companies in specific sub-categories, restrictions

might have changed during our selected time frame. We tried to cross-check this by using

several sources. We acknowledge that our chosen data collection process, sample and

measures of different variables influence the outcomes of our quantitative part. In other

words, other measures might have produced different outcomes.

When considering the qualitative part of this thesis, some limitations are also addressed.

First of all, the research strategy consisted of a multiple case study including three

companies. The nature of this strategy and the small sample size limits the transferability

of our qualitative findings to other Scandinavian MNEs. However, the purpose of using a

multiple case study was to investigate and compare expansion experiences of managers

from MNEs of different national backgrounds and industries. Moreover, the fact that

interviews were only conducted with one or two managers at each company, can be seen as

a limitation. Interviewing more people could have potentially provided us with a broader

118

perspective and deeper understanding of determinants, challenges and opportunities of

the companies’ expansion in China. Since this thesis is only focused on companies from the

retail/wholesale and manufacturing industries, it limits the transferability of results to

companies in these sectors. As mentioned in chapter 3.5, the generalisability of our study is

influenced by the fact that the interviews only include companies from two of the three

Scandinavian countries. Nevertheless, the quantitative part includes companies from all

Scandinavian countries. Firms from Scandinavia are also claimed to exert similarities in

regards to business culture and management style. In addition, the focus of the analysis

has not been on the differences of influential factors between the countries. Based on these

arguments, this limitation is not considered to impact our findings to a large extent.

I

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XVII

Appendices

Appendix A – Model 1

Appendix B – Model 2

Appendix C – Model 3

Appendix D – Model 4

Appendix E – Model 5

Appendix F – Model 6

Appendix G – Model 7

Appendix H – Likelihood Ratio Tests

Appendix I – Pearson Correlation Table Model 6

Appendix J – Interview Questions Case Companies

Appendix K – Interview Global Law Office

XVIII

Appendix A – Model 1

* Includes the control variables

XIX

Appendix B – Model 2

* Includes the control variables and internal variables except asset specificity

XX

Appendix C – Model 3

* Includes the control variables and external variables

XXI

Appendix D – Model 4

* Includes the control variables, internal variables except asset specificity and

external variables

XXII

Appendix E – Model 5

* Includes the control variables and internal variables

XXIII

Appendix F – Model 6

* Includes the control variables, internal variables and external variables

XXIV

Appendix G – Model 7

* Includes the control variables (home country and year of entry as dummy

variables), internal variables and external variables

XXV

Appendix H – Likelihood Ratio Tests

Model 1 and 2

Model 1 and 3

Model 2 and 4

Model 3 and 4

Model 5 and 6

XXVI

Appendix I – Pearson Correlation Table Model 6

* The asterisk indicates significance of correlation coefficients at a significance

level of 0.05

XXVII

Appendix J – Interview Questions Case Companies

1. Please describe the entry strategy and the expansion strategy of your company in China.

What form of entry did your company choose and what were the reasons behind it?

2. What have been the main opportunities since entering and expanding in the Chinese

market?

3. Which have been the main external challenges since entering and expanding in the

Chinese market? Please consider the following factors as examples:

- Cultural differences

- The Chinese labour market

- Legislation, regulations and the institutional environment for foreign MNEs in the

industry

- Defence of intellectual property

- The competitive environment

4. Which have been the most important internal factors since entering and expanding in the

Chinese market? (e.g. firm-specific know-how, firm size, multinational experience,

organizational structure)

5. Can you please describe the degree of local adaptation of the concept/solutions offering in

the expansion in the Chinese market?

6. Who are eventually the decision makers in various strategic moves? Is it the board and/or

top management team at home or those in China or some combinations of both?

XXVIII

Appendix K – Interview Global Law Office (Associate Muriel He) 1. Please describe the regulatory process which a Scandinavian MNE usually goes

through when setting up a new business in China. Are there any differences in this

process depending on the home country of the company?

The regulatory process for setting up a new business in China:

Record-filing Procedure：

a. Application for reservation of the Chinese company name of MNE;

b. Going through record-filing procedure of establishment of MNE;

c. Application for incorporation of MNE;

d. Application for chop carving;

e. Application for foreign exchange registration;

f. Open bank accounts

g. Register with customs. (If the MNE’s business scope covers import and export service)

Or

Approval Procedures:

a. Preparation of feasibility study report, articles of association, and joint venture contract,

where necessary, as well as ancillary application materials；

b. Obtain approval for the project from the National Development and Reform Commission or its

local branch；

c. Obtain approval to establish a foreign‐invested enterprise from the Ministry of Commerce or its

local branch；

d. Obtain a business license from the State Administration of Industry and Commerce, or its local

branch；

e. Register with the Public Security Bureau and obtain approval for preparation of seals；

f. Obtain foreign exchange registration certificate and approval to open a foreign currency

registered capital account from the State Administration of Foreign Exchange；

g. Open bank accounts

h. Register with customs. (If the MNE’s business scope covers import and export service)

There are no differences in this process depending on the home country of the company.

XXIX

2. What entry mode and expansion strategies are most commonly used by

Scandinavian MNEs and what are the reasons behind them?

A. JV

Two types of Chinese‐foreign joint ventures are permitted under Chinese law: the equity joint

venture (EJV) and the co‐operative (or contractual) joint venture (CJV), both of which can be

established as limited liability companies. Where a joint venture with a Chinese party is not

required by law, foreign investors should carefully consider whether there is a genuine need to

work with a local equity partner, or whether it may ultimately be more cost‐effective to establish a

wholly foreign‐owned enterprise. The costs of dealing with a local partner, who will often resist

managing the joint venture in accordance with Western practices, may ultimately be greater than

simply starting from scratch. In dispute situations, the Chinese partner to the joint venture will

often have the upper hand, no matter how carefully agreements are drafted. In most Chinese

jurisdictions, foreign investors can work directly with the government and regulators without the

assistance of a local business partner. Promises of access to or special treatment from local

government should not be the basis for forming a business relationship. In an equity joint venture,

each party may contribute registered capital in the form of cash, land, buildings, intellectual

property, equipment and/or technology. The parties then share in the management, profits, risks

and losses of the joint venture in proportion to their relative equity interests. Co‐operative joint

ventures are in many ways similar to equity joint ventures, but are somewhat more flexible in that

the joint venture contract may provide for the foreign party to recoup its investment before the end

of the term of the co‐operative joint venture. The form of the parties’ capital contributions to a co‐

operative joint venture may also be more flexible and its management may be contracted out to a

third party. In the past, it was generally required that the foreign party contribute at least 25 per

cent of the registered capital of the joint venture. This is no longer the case. Unlike the approval

process for a representative office, which is largely a matter of routine, the authorities responsible

for approving the establishment of joint ventures (and wholly foreign‐owned enterprises) have the

power to reject or suggest revisions to application documents if they determine that the documents

contravene Chinese law or government policy. Interpretations of Chinese law and the application of

policies can differ greatly from region to region. As such, practices in one Chinese jurisdiction may

not be applicable in any other jurisdiction in the country. Since, in practice, there is limited

administrative recourse available, foreign investors have no choice but to accept determinations

and rulings made by local government authorities.

XXX

B. WOFE

Instead of a joint venture, a foreign company may choose to establish a wholly foreign‐owned

enterprise (WFOE). WFOEs, like joint ventures, are usually established in the form of limited

liability companies. The main advantage of a WFOE is that the foreign investor, not having Chinese

partners, has sole control over the management and financial affairs of the company. Several

foreign investors may partner to establish a WFOE either by investing directly or by establishing an

offshore entity to invest in the WFOE. In comparison to a joint venture, establishing a WFOE is

relatively simple, since there is no requirement to enter into a joint venture contract with a local

partner. At present, WFOEs are still prohibited in certain industries.

XXXI

3. Which are the main regulatory/institutional factors that influence the entry mode

decisions/expansion strategies of Scandinavian MNEs in the retail industry in China?

The laws and regulations that governed the Foreign-invested Enterprises

i. Whether the retail industry have been ruled in Catalogue for the Guidance of Foreign

Investment Industries (hereinafter referred to as “Catalogue”)

Catalogue for the Guidance of Foreign Investment Industries: The Catalogue shall be

applicable to the projects of investment and establishment of Chinese-foreign equity joint ventures,

Chinese-foreign contractual joint ventures and foreign-funded enterprises (hereinafter referred to

as enterprises with foreign investment), and projects with foreign investment in other forms

(hereinafter referred to as projects with foreign investment) within the territory of China; Projects

with foreign investment fall into 4 categories, namely encouraged, permitted, restricted and

prohibited ones. Projects with foreign investment that are encouraged, restricted and prohibited

shall be listed in the Guidance Catalogue of Industries with Foreign Investment. And projects with

foreign investment that don't fall into the categories of encouraged, restricted or prohibited

projects shall be the permitted projects with foreign investment. The permitted projects with

foreign investment shall not be listed in the Guidance Catalogue of Industries with Foreign

Investment.

ii. The registration process of the Foreign-invested Enterprises

Interim Administrative Measures for the Record-filing of the Incorporation and

Change of Foreign-invested Enterprises: Projects with foreign investment fall into

encouraged, restricted and prohibited categories under the 2015 edition of Catalogue, which has

special requirements for the equity, senior executives, regardless of the amount or size of the

investment (new-setting, mergers and acquisitions), the approval procedures shall be applied to

the projects; Mergers and acquisitions of domestic non- foreign- invested enterprises (including

equity merger and acquisition), conducted by foreign investors, should be governed by Provisions

on the Merger and Acquisition of Domestic Enterprises by Foreign Investors, the approval

procedures shall be applied.

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4. What are the main challenges, in terms of regulations or institutional voids, which

foreign retail companies have to deal with when entering and expanding in China?

(E.g. bribery, lack of IP protection, lack of understanding of regulations, price

control, the labour market)

A. Antitrust and Unfair Competition

The basic law governing antitrust and competition issues in the PRC is the Anti-Monopoly Law

(“AML”), which entered force on August 1, 2008. The AML is China’s first comprehensive

competition law, applying to almost all sectors of the economy. The main features of the AML are:

• A merger filing system, requiring mergers and acquisitions, meeting specific financial thresholds,

to be notified to the Ministry of Commerce Anti-Monopoly Bureau (“MOFCOM”) and approved

prior to closing;

• A prohibition on monopoly agreements; and

• A prohibition on the abuse of a dominant market position.

Merger filing should be paid lot attentions by an MNE if it wants to enter the market by merger.

The AML requires transactions qualifying as “concentrations” to be notified to MOFCOM. Higher

specific thresholds exist for banks, insurance companies and other financial institutions.

Transactions between related parties, such as reorganizations taking place entirely within a

corporate group, are expressly exempted from the AML filing obligation. It is worth noting that:

• The thresholds can be met through imports into China alone – no Chinese assets or presence are

needed;

• An AML filing will be required regardless of whether a transaction takes place in China or

offshore;

• Transactions that are closed without filing in China, despite meeting the thresholds above, expose

both the acquirer and the seller to substantial penalties; and

• Even if the thresholds set out above are not met, MOFCOM has the ability to require a filing to be

made, either before or after closing. MOFCOM has stated that this will only occur where a

substantial negative impact on competition.

B. Tax

The taxation of enterprise income in China is governed by the Enterprise Income Tax Law and its

associated laws and regulations. An enterprise’s taxable income is primarily based on whether a

company is considered to be a “resident” or a “non-resident” of China. Resident companies are

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those companies established under Chinese law or foreign companies with management or control

based in China. Resident companies are subject to income tax on their worldwide income within

the taxation period. Non-resident companies are subject to tax on their income relating to their

China operations. In general, the enterprise income tax is 25% on the taxable income of a resident

business. Non-resident businesses may be subject to a reduced tax rate, as may qualifying small

businesses or businesses operating in certain encouraged geographic zones or industry sectors.

China also has several forms of tax that may be levied depending on the nature of a transaction.

The Value Added Tax (VAT) is a tax generally payable on the production, sale and importation of

goods (generally tangible goods), and certain types of services. In general, the VAT is designed to

pass the ultimate payment of the tax to the end consumer of the goods or services. The

Consumption Tax is a tax payable on certain non-essential or luxury consumer goods. The Business

Tax is a tax payable on the provision of services (that are not covered by the VAT), and the transfer

of intangible and real property. The tax rate for these taxes varies depending on factors such as the

industry at issue and the particular circumstances of the payer.

There are numerous other taxes that may apply depending on the specific business activities at

issue. Foreign investors should always seek advice on the taxes that may apply in any given case as

part of their decision to do business in China.

C. Employment

The relationship between employers and employees is heavily governed by statute in China. The

law provides basic minimums with respect to most aspects of the employment relationship, and in

some areas stipulates the terms that must form the basis of the employment contract. In recent

years, China has established certain state-administered social insurance programs for employees.

These programs typically involve contributions from both employers and employees (through

payroll deductions), and provide benefits such as medical insurance, injury and disability

insurance, unemployment insurance, old age pension, housing fund and other benefits. Employers

and employees are free to negotiate such aspects as salary, job description, vacation entitlement,

and other benefits above the minimums provided by law.

Employment contracts in China may be formed on an open-term, fixed-term or task-specific basis.

Employers are often reluctant to form open-term contracts, as they are not permitted to terminate

employment relationships except in the event of serious dereliction of duty, protracted illness and

similarly high thresholds. For this reason, employers generally prefer to structure their

employment relationships on a fixed-term or, less commonly, on a task-specific basis. However, it

is to be noted that fixed-term agreements also have limited benefits since the law provides that,

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following two consecutive renewals of a fixed-term employment contract, it will automatically be

treated under the law as an open- term contract.

Employers are often concerned about their ability to protect their business interests in relation to

past and present employees. Chinese law recognizes the concepts of confidential information and

trade secrets, and provides protection against theft or misuse thereof. China’s patent legislation

also contains provisions that generally deem intellectual property developed by an employee in the

context of his or her employment to be the property of the employer, although additional

compensation for the inventor may be required. In any event, the employment agreement should

carefully set out the employee’s confidentiality and use of intellectual property obligations, as well

as the employer’s entitlement to intellectual property created by the employee.

Chinese law also permits the use of post-employment non-competition arrangement. A non-

competition clause in China must provide the employee with compensation throughout the non-

competition period. The exact parameters of the compensation are not specifically addressed in the

law, although in practice the amount is generally between one-half to two-thirds of the employee’s

typical compensation, paid on a monthly basis. An employer and an employee are also permitted to

negotiate a penalty that will apply if the employee breaches his or her non-competition obligations.

The term of the non-competition obligation must not exceed two years after the expiry or

termination of the employment relationship.

D. Import and Export

As a member of the WTO, China’s system of tariffs and duties is structured in accordance with the

WTO agreements and other bilateral and multilateral trade agreements. China has put in place

certain mechanisms (such as bonded zones and processing trade arrangements) that can be

employed to import and re-export goods with reduced or eliminated tariffs and duties.

In China, companies are not permitted to engage in import or export activities unless they first

undergo a registration process provided by law. It is also possible to conduct import and export

activities using a qualified agent as an intermediary. Unless otherwise provided by law, qualified

importers and exporters are permitted to conduct import and export activities without restrictions

(subject to certain procedural requirements). In some cases, the law of China imposes special

license and quota requirements on the import and export of certain goods and imposes special

license requirements on the import and export of certain technologies. The law also prohibits the

import and export of certain goods and technologies. The goods and technologies that are subject

to certain restrictions or prohibitions are updated in catalogues released by the authorities from

time to time.

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5. In what way have the dynamics of entry requirements changed the costs and

benefits of different entry modes over time?

Please refer to the answers for question 2.